Environmental Accounting: Volume 3

In the two years since the publication of the last volume of this series, the planet has witnessed some devastating environmental events some of which can be attributed to human causes. However, we have also seen the world uniting (except mainly for the United States and Australia) to reduce greenhouse gases and hopefully slowdown global warming. Recognizing that saving the planet from environmental degradation depends on the concerted effort of all countries and entities is a major first step in this rescue effort. Depending on the good graces of countries and companies to voluntarily join this effort however, we believe, is a losing proposition.

This chapter explores how one company's disclosure contributes to and reflects the broader discourse of environmentalism over time. We select some of Noranda's earliest environmental reports, 1990, 1992 and 1994, and some of its recent sustainable development reports, 2000, 2002 and 2004. Using Eder's framework (1996), we undertake a discourse analysis along three dimensions: moral responsibility, empirical objectivity and aesthetic judgement. This analysis is then linked to environmental philosophy perspectives as per Gray et al. (1996). Even though Noranda's disclosure changes significantly, the reports reflect a mixture of environmental philosophies that remains relatively constant with the social contract perspective being dominant.

We investigate the state of environmental financial reporting since the increased regulation imposed by the Securities and Exchange Commission and other regulatory bodies during the 1990s by examining mandatory environmental disclosures for a sample of petroleum firms. Our results indicate that while the majority of firms stated that they accrued remediation liabilities and environmental exit costs, only about half or less of these firms disclosed the amount of the accrual, even though disclosure is required if the amount is material. Consistent with prior research, we find that cross-sectional variation in disclosure is positively related to firm size and financial leverage. Our results show that environmental disclosures increased during the 1990s, concurrent with increased regulatory pressure and corresponding threats to oil companies’ legitimacy. Firms’ disclosure levels in 1998 were strongly related to their disclosure levels in 1989 –i.e., those companies that reported more (less) information in 1989 did the same in 1998. Thus, individual firms appear to have distinctive environmental disclosure policies.

This paper examines factors that are associated with the level of a firm's environmental disclosure in the footnotes of its annual report financial statements and its 10-K report filed with the Securities and Exchange Commission (SEC). The levels of environmental disclosure are measured using the Wiseman scale (Wiseman, 1982). An N-chotomous probit analysis is utilized where the level of disclosure is the dependent variable, and the independent variables are firm characteristics including: (1) institutional blockholder stock ownership, (2) amount of foreign concentration, (3) earnings volatility, (4) profitability, (5) leverage, (6) future need for debt financing, (7) firm size, and (8) industry membership.

The results indicate that higher foreign concentration, and to some extent, higher earnings volatility are associated with less environmental disclosure. These results provide evidence that firms with higher foreign concentration are more reluctant to disclose environmental information because they are under higher scrutiny from other countries and the international community. Additionally, it is probable that firms with a more volatile earnings process are less willing to disclose potential environmental costs and obligations because these additional expenditures can have an especially adverse effect during low-earnings periods.

We examine the relationship that exists among bond ratings, bond yields, and various estimates of a firm's contingent environmental remediation liability using a sample of new bond issues. Our results indicate that the largest external EPA-based estimates of the firm's environmental obligations are significantly associated with a firm's bond rating, providing relevant incremental information beyond that supplied by the environmental accruals presented in the financial statements. Furthermore, while the accrued environmental liability is shown to have a direct association with the bond yield, the external EPA-based estimates provide an indirect relationship with the bond yield through their influence on the bond rating. These results contribute to the extant literature by empirically clarifying the role of various environmental liability estimates in establishing a firm's bond rating and further indicating their connection with the pricing of corporate debt.

Firms embrace environmental management strategies for a number of reasons. Government regulation pushes firms to comply with environmental standards, thereby creating a need for companies to manage environmental performance outcomes. Pressure for good environmental performance is also exerted by a variety of stakeholders including investors, customers, non-governmental organizations, local communities, and employees. Increasingly, the investment community has recognized that environmental performance is closely linked to firm value. In Measuring the Future: The Value Creation Index, a 2000 study of intangible drivers of firm value by Cap Gemini Ernst and Young, environmental performance was ranked as a key intangible driver of firm value. Financial measures of firm value have also been empirically linked to environmental liabilities (Barth & McNichols, 1994; Blacconiere & Northcut, 1997; Hughes, 2000), environmental awards (Klassen & McLaughlin, 1996), and to toxic emissions (King & Lenox, 2002). Increasingly, customer demands drive firms to embrace better environmental management practices. For example, both Ford and General Motors require that their suppliers achieve environmental management certification under the International Standards Organization (ISO) 14001 guidelines, and many other large organizations are following suit. From a starting point in 1995 of just 257 ISO 14001 certifications awarded to facilities in 19 countries, the latest data available for 2004 shows that over 90,000 certifications have been awarded to facilities in 127 countries around the world (ISO, 2005). In addition to implementing an environmental strategy as a reaction to external pressures, managers realize that effective environmental performance leads to more favorable internal outcomes. The operational performance outcomes associated with implementing a proactive environmental strategy include reduced waste and discharges, increased efficiency, reduced energy and resource costs, lower risk and liability, better corporate reputation, and reduced compliance costs (Sharma & Vredenburg, 1998; Hart & Ahuja, 1996; Hart, 1995).

From time to time, it proves useful to theorists of advancing disciplines to consider how ideas developing in related disciplines might provide insights into their own progression. Environmental accounting and the systems sciences are parallel developments of the past half-century. The purpose of this article is to introduce certain ideas that are maturing in the systems sciences for consideration by environmental accountants and managers. Particular emphasis is placed on the works of Nicholas Georgescu-Roegen and James Grier Miller. Collectively, these ideas present evidence that economies emerge in environmental processes and continue only as long as they are fed by those processes. Accounting is concerned with economic process disclosure. A conclusion might be drawn, consequently, that environmental processes should be conspicuously disclosed in public accounting statements.