Voluntary Incorporation Of Social And Environmental Risk Assessment Accounting Essay

Published:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

In global banking practices, there is an emerging trend among bankers to voluntarily incorporate social and environmental risk assessment as part of their credit appraisal techniques particularly in the lending proposal for projects finance (Deringer, 2005; IFC, 2007; Lawrence, 2009; Scholtens and Dam, 2007). The main purpose of these banks taking into account social and environmental aspects in their lending decision process and managing business operations is due to risk management (Coulson and Dixon, 1995; IFC, 2007; Thompson and Cowton, 2004) and to present a good reputation profiles (Deringer, 2005; IFC, 2007; Scholtens and Dam, 2007; Strandberg, 2005; Thompson and Cowton, 2004). These ethical banks embrace the principle of not being involved in any business deals that are predicted to cause environmental impacts and degrade the quality of life of the people (Principles, 2006).

In line with these global developments, this study aims to investigate the disclosure of environmental related information made by listed local banks in Malaysian in their efforts to manage the business operations and lending policies. This study will identify whether the mandatory requirements set by Bursa Malaysia for public listed companies to report on their corporate responsibilities have an impact on public listed commercial banks to disclose environmental information. It seeks to provide evidence about the extent to which local banks in Malaysia provide environmental information on their lending policies. There has been limited research works on the disclosure of environmental information relating to the banking industry in Malaysia. This study draws on legitimacy theory to underpin the arguments on the disclosure of environmental related information made by listed local banks in Malaysia

2.0 LITERATURE REVIEW

Reliance on government regulators and administrators initiatives in conserving the natural environment and quality of life of the people is not enough to obtain effective results. Banks as capital providers should play a key role in conserving the environment by incorporating social and environmental factors into their lending process and procedures as this action is expected to motivate the clients i.e. developers to ensure that their projects do not have an adverse impact on the environment (Bernama, 28 November 2007). Even though, the banking sector do not directly construct a negative impact on the environment, but the effect of banks' decisions may implicitly affect the natural environment (Thompson and Cowton, 2004). Drawing on United Nations Environmental Programme (UNEP, 1992) report, "Statement by Banks on the Environment and Sustainable Development", it is recognized that there is a link between banks' lending decisions and the environment (UNEP, 1992; as cited by Thompson & Cowton, 2004).

Furthermore, by taking into account social and environmental aspects as part of their lending procedures, banks are indirectly acting responsibly to societies (Branco and Rodrigues, 2006; Lawrence, 2009; Scholtens and Dam, 2007). Prior researchers have used legitimacy theory to explain and analyse various organizational behaviours undertaken by organizations in order to survive. Legitimacy theory, which is derived from the concept of organizational legitimacy, posits that 'in order to continue operating successfully, corporations must act within the bounds of what society identifies as socially acceptable behaviour' (O'Donovan 2002, p. 344). Therefore, by incorporating the effects on the environment as part of their lending policies, banks are acting within societal norms in order to remain legitimate and to fulfil their social contracts. By incorporating environmental matters into their business decisions, they essentially have a good internal control practice in managing credit risk, parallel with Basel II Framework requirement (Deringer, 2005). Under the Basel II Framework agreement, banks need to maintain a minimum capital amount requirement in order to stay above the potential risk condition against credit risk and operational risks (Deringer, 2005). Banks that have employed stringent lending procedures relative to the environment and social issues are seen adequate to manage their credit risk and operational risks. As a result, the amount of capital reserved can be reduced with the consent of its banking supervisors (Deringer, 2005).

Currently, there is an international guideline on social and environmental risk assessment for project financing known as Equator Principles. Banks that has adopted these Principles expects their clients to conduct their project development in a manner that is socially responsible and avoid where possible from contributing negative impact to the ecosystems and communities. However, if such impacts are unavoidable, they should be reduced, mitigated and/or compensated for appropriately (Principles, 2006). Prior studies provide evidence that there is a significant difference in terms of social, ethical and environmental policies between adopters of the Equator Principles and non-adopters of such principles (Scholtens and Dam 2007). Scholtens and Dam (2007) concluded that banks that adopted the Equator Principles signal responsible conduct of their banking practices.

Good governance of internal control and risk management strategies are vital for banks to earn sustainable banking and prosper growth of profit in the future (Jeucken, 2004). Issues of sustainability and climate change have created awareness among stakeholders. Many potential stakeholders globally are selective and educated in making investment decision (Deringer, 2005). As a result demand for information on how banks govern the issues of social and environmental risk in order to stay relevant and sustainable in market economies, is increasing (Deringer, 2005; IFC, 2007).

Currently, there is limited research and information on environmental disclosure in business policies and operations of Malaysian banks. Hamid (2004) found that the highest disclosure theme reported by banks in their 1999 annual reports was on product related disclosure as compared to other issues like environment, community and human resources. Hamid (2004) assumed that bankers disclosed more information on banking products and services in the annual reports as it was the media to convey information to depositors, investors and the public. It also acts as a channel to attract, create confidence and enhance goodwill among the stakeholders. His findings indicate that environmental disclosure was only 2.08%. This finding implies that Malaysian banks have a vague perspective on the relationship between banking activity and its impact on the environmental and their role in managing risk.

A similar research on environmental disclosure focusing on top 50 companies listed on Bursa Malaysia was done by Yusoff and Lehman (2008). Results of the study indicate that the evidence that trigger companies to disclose environmental information was due to their adaptation of ISO 14001 in their business operations. Companies that employed ISO 14001 were committed to comply with environmental legislation and regulations and therefore were motivated to disclose information in the annual reports to prove that the environmental performances of the companies are continuously improving (Yusoff and Lehman, 2008). Environmental sensitive companies and high financial performance companies were found not to be significant factors for companies to disclose environmental information (Yusoff and Lehman, 2008).

3.0 DATA AND METHODOLOGY

This study uses content analysis of companies' annual report to quantify relevant items of environmental disclosure. The sample of annual reports chosen for content analysis was sourced from Bursa Malaysia website for the year 2008 comprising of eleven (11) local commercial banks (i.e. Group annual reports of parent's bank). The number of sample is based on Bank Negara Malaysia list of local commercial and Islamic banks, focusing on the holdings companies as at December 2009. The choice of using annual reports as medium to assess on environmental disclosures is consistent with previous research (Belkaoui and Karpik, 1989; Gray, et al., 1995; Unerman, 2000) since they contain highly credible information about the companies. Unit of analysis of data captured was measured using number of sentences (Hackston and Milne, 1996; Tsang, 1998).

The investigation for the environmental disclosure in this study was based on six types of environmental disclosure themes namely:

environmental policies/standard;

environmental management, system and audit;

lending and investment policies;

conservation of natural resources and wildlife;

recycling activities; and

conservation of energy in the conduct of business operation

(Branco and Rodrigues 2006)

4.0 FINDINGS AND DISCUSSION

Table 1 provides the results on the number of banks that disclose environmental information. Of the eleven (11) banks, eight (8) provided some environmental disclosures (73%) while the remaining three (3), (27%) did not disclose any environmental related information based on the disclosure themes identified.

Table 1: Disclosure of Environmental Information

Number

Percentage of

Total Sample

Disclosing Companies

(making at least one disclosure)

8

73%

Non-Disclosers

3

27%

Total

11

100%

Table 2 presents the results of disclosure based on the number of total sentences disclosed. The results indicate that the number of sentences disclosed were more on conservation of energy in the conduct of business operation (40%), and conservation of natural resources and wildlife (36%). None of the companies reported on environmental management, system and audit. Five (5) companies made disclosures on recycling activities, two (2) companies disclose environmental policies, one (1) company disclosed information on lending and investment policies.

Table 2: Summary of Environmental Disclosure

Characteristic / Theme

Companies

Sentences

Number

(a)

Percentage

(b)

Number

(c)

Percentage

(d)

Environmental Policies/

Standard

2

18%

2

4%

Lending & Investment

Policies

1

9%

2

4%

Environmental Management,

System and Audit

0

0%

0

0%

Conservation of Natural

Resources and Wildlife

5

45%

16

36%

Conservation of Energy in

The Conduct of Business

Operation

5

45%

18

40%

Recycling Activities

5

45%

7

16%

Total

45

100%

Note:

(a)Number of companies making at least one disclosure in the given environmental theme.

(b)Number of companies making at least one disclosure as percentage of total number

of commercial banks in sample (total sample is 11 banks).

(c)Number of sentences disclosed in the given environmental theme.

(d)Number of sentences disclosed as percentage of total sentences disclosed

Total sample is 11 banks; out of this sample total bank disclosed at least one disclosure is 7.

Table 3: Detailed Environmental Disclosure According to Environmental Themes (Source: Annual Report, 2008)

REPORTER

SECTOR

Location of Report

No. of Senten-ces

Environmental Policies /Standard

Lending & Investment Policies

Environmental Management, System and Audit

Conservation of Natural Resources & Wildlife

Conservation of Energy in the Conduct of Business Operation

Recycling Activities

1

Malayan Banking Berhad

Commercial

CSR section

7

1

2

-

1

2

1

2.

Alliance Financial Group Berhad

Commercial

CSR section

8

1

-

-

4

2

1

Calendar

2

-

-

-

1

1

3.

CIMB Group Holdings Berhad

Commercial

-

1

-

-

-

1

-

-

4.

EON Capital Berhad

Commercial

CSR section

3

-

-

-

-

2

1

5.

Hong Leong Bank Berhad

Commercial

CSR section

1

-

-

-

-

-

1

6.

Public Bank Berhad

Commercial

Chairman's Review

2

-

-

-

-

2

-

CSR section

17

-

-

-

9

8

-

7.

AMMB Holdings Berhad

Commercial

CSR section

4

-

-

-

1

1

2

8.

RHB Bank Berhad

Commercial

-

0

-

-

-

-

-

-

9.

Affin Bank Berhad

Commercial

-

0

-

-

-

-

-

-

10.

Bank Islam Malaysia Berhad

Islamic Bank

-

0

-

-

-

-

-

-

11..

Bank Muamalat Malaysia Berhad

Islamic Bank

-

0

-

-

-

-

-

-

Total

45

2

2

0

16

18

7Table 3 provides detailed environmental information based on the themes identified. Results indicate that Public Bank reported the highest disclosure score focusing on issues relating to conservation of energy in the conduct of business (10 sentences) and conservation of natural resources and wildlife (9 sentences). Two of the sentences on conservation of energy in the conduct of business were reported in the chairman's review.

Findings indicate that in 2008, seven (7) banks disclosed environmental information that fit into various environmental themes identified. Results of the study provide a positive change in the disclosure of environmental information amongst commercial banks in Malaysia. Hamid (2004) found that only one (1) bank disclosed environmental information. This suggests that management of commercial banks are currently more aware of environmental issues and its impact on their banking activities. Malayan Banking Berhad being the only bank that discloses environmental information based on most of the disclosure themes identified except for environmental management, systems and audit. Furthermore, Malayan Banking Berhad is also the only bank that disclosed information incorporating environment as part of their lending policies. Malayan Banking Berhad and Alliance Financial Group Berhad are the two banks that disclosed information on environmental policies in running their business activities. Both Islamic banks (Bank Islam and Bank Muamalat) and two commercial banks (RHB Bank and Affin Bank) disclose zero information on any of the environmental themes identified. None of the eleven (11) banks disclosed any information under the environmental management, systems and audit. This may be due to the fact that none of the banks have employed ISO 14001 in managing their business operations. The findings are consistent with (Yusoff and Lehman, 2008) who argue that the motivation to disclose environmental information in companies is due to the adoption of ISO 14001.

5.0 CONCLUSION AND IMPLICATIONS

Results of this study provide a contribution to the corporate environmental disclosure literature by providing evidence that regulatory efforts are important mechanism in promoting greater corporate environmental disclosure. The results revealed significant increase in environmental disclosure amongst commercial banks in 2008 relative to such disclosures in 1999. This infers that when regulatory bodies emphasize environmental disclosures, managers of commercial banks align their environmental disclosure strategy with those of the regulatory bodies. The finding is consistent with Darus, et al. (2008) who argues that regulatory efforts have the prospect of becoming a significant force in promoting the extent and quality of CSR disclosure. Even though, there is an increase in disclosure over the years, the limited amount of disclosure made by banks could infer that the local banks may not incorporate environmental elements as part of their lending policies. This may reflect on their credit risk management policies.

Generally, the results of the study support legitimacy theory in explaining the increased in the environmental disclosure by the banking industry in Malaysia. The increased in environmental disclosure implies that commercial banks in Malaysia agree to operate within certain bounds imposed by regulators in order to enjoy continued access to customers and resource markets

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.