Agency Theory And Carbon Disclosure – Effects Of Corporate Companies On The Environment

Practical Motivation

Discuss about the Agency Theory and Carbon Disclosure.

There have been extensive effects of the corporate companies on the environment. This creates a global crisis. It is extremely important to deal with this crisis. The reason why this global crisis has occurred is due to the harmful gases that are emitted from the manufacturing companies (Buniamin et al. 2010). The businesses of the companies are controlled and directed by the corporate governance and their activities. The companies are provided with a lot of restrictions and measurements by the corporate governance so that the emission of harmful gases especially carbon dioxide is minimized. The businesses are also forced to take part in various environmental activities such as tree plantation (Ioannou and Serafeim 2017).

The main aim of this research will be to emphasize the effects of the companies on the environment. Thus, the main focus of this research will be towards the influence of the leadership attributes of the companies on carbon disclosure. A new concept has been introduced so that the actions can be taken for managing the opportunities and the risks that can be faced by the company in the future years. Quantitative analysis will be performed to understand the effect (Saka & Oshika 2014). The data has been collected for this research with the help of a survey. Statistical analysis tool SPSS version 20 has been used for the analysis of the data. The dataset contained information about almost 5000 industries but for all the industries, information was not available completely. 306 industries have been found having valid information which will be used for the study.

Australia is nowadays facing serious challenges with the rapid advancements of technology. This has resulted in economic growth and development of the country. There has been gradual growth of the Australian economy over the years. However, this growth in the economy is challenged with the fall in the stock prices and the growth in the emission of the harmful gases in the environment. These environmental issues include emission of solid waste, air pollution, water pollution as well as water management. According to a research by Chang, Yeh and Liu (2015), it has been known that the emission of these waste products will increase in a considerable amount by the year 2020. This has created a challenge to achieve the sustainable economy. As pointed out by Herold and Lee (2018), the environmental issues that are caused by the industries are deforestation, dumping of wastes which are hazardous to the environment and polluting the air and the water as well. Considering all these factors, the government has considered taking various measures to keep the environment protected from any types of pollution. Decomposition and trend analysis is usually constructed in order to understand the relationship between the economic growth of the country and the environmental outcomes.

Data Collection

The corporate governance framework in place in Australia spreads beyond mere submissions with regulatory requirements with main voluntary elements. More so, an extensive number of provision throughout the federal and state legislation makes the corporate directors accountable if the company fails to adhere to the multitude of requirements (Juliet 2015). There are laws and guidelines that run a corporate which include the non-binding guidelines, soft law and the hard law, together with the market and agency prospects, form a framework for corporate governance (Trireksani, T. and Djajadikerta 2016). Satisfying the best practice of commercial leadership and commentary on the environment are a manifestation to this tow, but interconnected spheres of presentation. The concept that was introduced in a report in the 1966 tell companies and organization not only to be financially sound but also environmentally account so as to ensure the rights future generation are taken into consideration. Taking of the right measurements to ensure the protection of the environment will reduce already caused damage and therefore reduce the long-term effects to the next generation.

The most important crisis that is currently of major interest to the world as well as the industries is the environmental pollution. This pollution supposedly affects the elements of nature. Thus, the companies are forced to take part in activities to save the environment. It is believed by several scientists that as environmental pollution increases with the emission of harmful gases, people are getting more exposed towards environmental dangers. The carbon release in the environment is increasing each day and this in turn increases the level of carbon dioxide in the atmosphere. Thus, it is extremely important to reduce these emissions by the companies. The companies have the potential to reduce the carbon emissions by their companies by adopting necessary changes. The boards, stakeholders and the managers of the companies can take the necessary decisions that will be helpful in controlling the amount of pollutant the company releases in the atmosphere. Significant risks are brought to an organization as a result of this emissions as well as to the investments of the shareholders. The organization is affected either directly or indirectly by climatic changes indicated by natural calamities.

The motivation of the research stands to investigate whether good corporate leadership practices are important in illustrating environmental responsibility of organizations in Australia. The corporate governance framework in place in Australia spreads beyond mere submission s with regulatory requirements with main voluntary elements. More so, an extensive number of provision throughout the federal and state legislation makes the corporate directors accountable if the company fails to adhere to the multitude of requirements. Corporate sustainability is a main concern that of the modern corporations to today, most environmental reporting is done voluntarily, there has been an increase in the number of writers who have argued about the effects of the corporate activities on the environment, and the feel that the companies should be held accountable for their mistakes at a larger audience than just its stakeholders. The current economic predicament has added a new phase of change which requires being instant rather than that of a certain period. Increased competition, global competition, new technologies and fast-changing environments call for a change in the management in organizations.

Based on the literature review, the following hypothesis statements has been framed. The Null Hypothesis and the Alternate Hypothesis that will be required in order to conduct the study is described as follows:

Null Hypothesis (H₀): There is no significant difference between the voluntary disclosure scores on the basis of the organizational initiatives.

Alternate Hypothesis (H_A): There are significant differences between the voluntary disclosure scores on the basis of the organizational initiatives.

There is information about 306 different organizations in the dataset. All these organizations had taken part in the survey conducted for the Carbon Disclosure Project (CDP). More than 5000 industries had taken part in this survey. The information shared by the rest of the industries over the selected years 2011 – 2016 has been found to be incomplete and thus has been eliminated for the purpose of the survey. Three different variables from the entire dataset has been considered suitable for this research. These include the carbon disclosure scores over the years, the scope of the amount of carbon emissions by the companies over the years and whether the organization has taken any initiatives against this problem of carbon emission. Generalization of the results have been done as the results are available over time and only one variable has been considered for each of the factors. Thus, the average of the disclosure scores, adoption of different strategies and the emission of carbon over the years have been considered as the measure for each of the variables. The necessary statistical analysis has been done on these three transformed variables in order to test the stated hypothesis.

The theoretical description of the data considered for the analysis is provided in table 2. Depending on the nature of the variables as described in the table below, the following analysis has been performed.

According to the nature of the variables described, organizational initiatives is a nominal variable and thus the variable is summarized with the help of a frequency table. Here “1” indicates that the companies have taken initiatives to reduce carbon emission and “0” indicates the companies have not taken any initiatives in reducing the carbon emissions.

It can be seen from the frequency table recorded in table 3 that out of 306 Australian Companies that has been considered for the study, 299 has been found to have taken initiatives against the carbon emission by the firms which is 97.7 percent of the companies on an average. Only 7 companies, that is, 2.3 percent of the Australian Companies have not yet taken any initiatives against the carbon disclosure and reduction in their percentages. It can be said from the discussion that the companies are aware of achieving their sustainability and the approaches that will be helping them in achieving a sustainable environment. Hence, approaches have been taken to fulfil the demands that the investors make from the companies. Diagrammatic representation of this data is shown with the help of a pie chart in .

Other than the variable organizational initiatives, there are two other variables that have been considered for the study. These are the carbon disclosure scores of the companies and emissions of carbon by the companies. Both of these variables are presented in the ratio scale in the dataset and thus can be used to evaluate the descriptive measures. Table 4 shows the descriptive measures for the variables “carbon disclosure scores” and “carbon emissions”.

The disclosure scores of the companies are scored between “0” and “100”. The firm’s position in the financial reports each year are indicated by the disclosure scores of the company in that particular year. For the simplicity of the analysis, median scores of the carbon disclosure scores over the years 2009 to 2015 have been considered. Considering the values in table 4. It can be observed that the average disclosure score has been obtained as 78.44. Thus, it can be said that the Australian companies are ranked around 78.44 in the financial reports. This can be said as the standard deviation of the scores have been found to be 17.22, which is very less. Further, a median score of 82 has been observed which indicates that 50 percent of the Australian companies have a carbon disclosure score above 82 which is very commendable. It can also be seen from the skewness value that the data is not symmetric and is negatively skewed. This indicates that the assumptions of normality have not been satisfied and also can be said that the disclosure scores do not follow any distribution. Diagrammatic representation of this data is shown with the help of a histogram in figure 2.

Another variable that has been considered is the emission of carbon from the companies. The values of the variables are given in metric tonnes. For the simplicity of the analysis, average of the amount of emission of carbon from the companies over the period of 2011 to 2017 have been considered. Considering the values in table 4, it can be observed that the average amount of carbon emission by the companies has been obtained as 12386.56. Thus, it can be said that the Australian companies have a huge variation in the emission of carbon. This can be said as the standard deviation of the emissions have been found to be 179438.62, which is very high. Further, a median emission amount of 14.85 metric tonnes has been observed which indicates that 50 percent of the Australian companies have a carbon disclosure score below 14.85 metric tonnes. From the difference between the average emission amount and the median emission amount, it can be said there are presence of outliers in the data. It can also be seen from the skewness value that the data is not symmetric and is positively skewed. This indicates that the assumptions of normality have not been satisfied and also can be said that the amount of carbon emitted by the companies do not follow any distribution. Diagrammatic representation of this data is shown with the help of a histogram in figure 3.

It has been already discussed that the data obtained as a result of the survey does not follow the regression assumption of normality. Thus, in order to express the relationship between the carbon disclosure scores and the carbon emissions by the company, the correlation analysis is the only appropriate analysis measure for this dataset. It can be seen from the coefficient of the Spearman’s correlation given in table 5 that the value of correlation coefficient has been obtained to be – 0.18. This indicates that there is a very weak negative relationship between the variables carbon disclosure scores and amount of carbon emissions by the companies. It can also be seen from the table that relationship is insignificant as the significance value is 0.759, which is higher than the level of significance (0.05). Thus, it can be said that an insignificant relationship exists between the variables Carbon disclosure scores and amount of carbon emission by the companies.

According the hypothesis that has been framed, the average difference between two categories of a variable, that is the average difference in the disclosure scores of carbon has to be tested. The most appropriate approach to test the difference between these two groups would have been the independent sample t-test, but it cannot be applied in this sample as the data obtained does not belong to any particular distribution.

In order to avoid this problem, non-parametric tests need to be performed. The test that can be used as an alternative to the t-test in the non-parametric setup is the Mann-Whitney U Test. Here, the dependent variable, carbon disclosure scores is in ratio scale and the independent variable or the control variable, Initiatives taken by the organization is in nominal scale of “yes” or “no”.

To test the hypothesis framed, a both-tailed test has to be performed. It can be concluded from the analysis that there is or is not any existence of difference in the carbon disclosure scores of the two group of companies. The results of the analysis are presented in the following section.

As already described above, the null and the alternate hypothesis are given as follows:

Null Hypothesis (H₀₁): There is no significant difference between the voluntary disclosure scores on the basis of the organizational initiatives.

Alternate Hypothesis (H_A1): There are significant differences between the voluntary disclosure scores on the basis of the organizational initiatives.

The results of the Mann-Whitney U Test are given in table 7. It can be seen from the table that asymptotic significance level is found to be 0.025, which is less than the stipulated level of significance (0.05). Thus, it can be said that the null hypothesis is rejected and there exists significant difference in the relationship between the carbon disclosure scores of the companies that have adopted and have not adopted any initiatives to decrease the carbon emission.

It can be seen here that there are only 7 companies out of the selected 306 companies that have not taken any initiatives for reducing the carbon emissions and increasing the carbon emission scores. As 7 companies is to little a number that can be used for comparison, these can be considered as the outliers to the data. Thus, it can be said that the companies have mostly adopted some initiatives to reduce the carbon emissions.

Further analysis has been conducted after removing the 7 companies that have not adopted any initiatives for reducing the carbon emissions. In this case, it has been tested whether there are any significant differences in the carbon disclosure scores in different types of industries. The null and the alternate hypothesis to conduct this test can be framed as follows:

Null Hypothesis (H₀₂): There is no significant difference between the voluntary disclosure scores on the basis of the industries.

Alternate Hypothesis (H_A2): There are significant differences between the voluntary disclosure scores on the basis of the industries.

Again the most appropriate method to test this difference is with the help of Analysis of Variance (ANOVA) test. Since the normality assumptions are not satisfied by this data, the non-parametric test will be used to test the difference. Here, the most appropriate non-parametric test is the Kruskal-Walis test. From the results of the test, it can be seen that the significance value is 0.779, which is higher than the level of significance (0.05). This indicates that the null hypothesis is rejected and the carbon disclosure scores differ in different types of industries.

The ranks obtained for industries such as health care, consumer discretionary and information technology have shown higher ranks than the other types of industries. This indicates that the disclosure scores in these industries are high and thus, the initiatives taken by these industries are efficient in reducing the carbon emissions and thereby increasing the disclosure scores. On the other hand, the ranks of the industries such as Materials, consumer staples, telecommunication services, utilities, energy have shown lesser ranks and this indicates that the disclosure scores in these industries are low. Thus the initiatives taken by these industries are not that sufficient in reducing the emissions. More sustainable measures need to be taken by these industries in order to increase the disclosure scores.

From the analysis conducted so far, it has been observed that there is difference in the disclosure scores between the companies that have adopted initiatives to reduce carbon emissions and the companies that have not taken initiatives in reducing carbon emissions. Also, it has been observed that the amount of carbon emissions has reduced considerably after taking the initiatives. The reduction in the carbon emission will reduce the environmental pollution and thus, the risks for the people as well as for the companies will also reduce. The stakeholders will also not be at risk for their investment. The environmental pollution provides climatic changes and natural calamities which in turn affects the performance of the companies. If the performance of the companies falls, the investment done by the stakeholders will also be at risk. Thus, this reduction is beneficial to both the companies as well as to the stakeholders.

Thus, it can be seen clearly that the agency theory is not directly related to the carbon emissions. The effect of carbon emissions and disclosure scores are risking the stakeholder’s investments and thus affecting the company. Thus the agency theory is affected by the stakeholder theory.

In this study, differences between the carbon disclosure scores has been assessed based on the initiatives taken by the organizations and on the different types of industries. Significant differences have been observed in case of both the tests. To conduct this test only 306 companies have been considered across the world which is very small percentage. Thus, from here, it can be said that the results can be different if more industries are considered.

In the study the difference in the disclosure scores have been assessed only on the basis of initiatives taken by the organizations and also on the basis of different types of industries. This might not be sufficient criterion to understand the differences. The climatic conditions are also responsible for the differences in the disclosure scores which has not been considered in the study.

Thus, this study can be proceeded further by considering a larger sample size of companies containing data on the most recent years. Comparison can be conducted on the difference in the carbon disclosure scores and carbon emissions of the companies before adopting and after adopting any initiatives to reduce the emissions. This will help in understanding how much the initiatives taken has been significant for the companies. Climatic changes can also be a factor for the differences in the disclosure scores. Thus the study can be specified to different geographical regions or countries and be compared accordingly.

References

Buniamin, S., Alrazi, B., Johari, N.H. and Rahman, N.R.A., 2010. An investigation of the association between corporate governance and environmental reporting in Malaysia. Asian Journal of Business and Accounting, 1(2).

Chang, D.S., Yeh, L.T. and Liu, W., 2015. Incorporating the carbon footprint to measure industry context and energy consumption effect on environmental performance of business operations. Clean Technologies and Environmental Policy, 17(2), pp.359-371.

Herold, D.M. and Lee, K.H., 2018. Carbon Disclosure Strategies in the Global Logistics Industry: Similarities and Differences in Carbon Measurement and Reporting. In Pathways to a Sustainable Economy (pp. 87-101). Springer, Cham.

Ioannou, I. and Serafeim, G., 2017. The consequences of mandatory corporate sustainability reporting, Harvard Business Review.

Juliet, O.O., 2015. The Effect of Corporate Governance on the Extent of Environmental Reporting in the Nigerian Oil Industry.International Journal of Business and Social Science

Saka, C. and Oshika, T., 2014. Disclosure effects, carbon emissions and corporate value. Sustainability Accounting, Management and Policy Journal, 5(1), pp.22-45.

Trireksani, T. and Djajadikerta, H.G., 2016. Corporate governance and environmental disclosure in the Indonesian mining industry. Australasian Accounting Business & Finance Journal, 10(1), p.18.

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