Environmental Disclosure and Financial Characteristics of the Firm: The Case of Denmark

Conclusions

Environmental reporting matters because it accounts for the company’s use of a non-agential stakeholder and scarce productive resource: the environment. Furthermore, efficient use of resources is associated with value creation and wealth accumulation. Sustainable value creation, however, rests upon the legitimacy of profit-making activities, such as the employment of natural resources. Legitimacy depends on stakeholders’ assessment of the externalities of corporate operations. In pursuit of such legitimacy and endorsing assessments, corporations report some of the environmental impact of their operations. This paper produces measures of disclosure performance and, more to the point, its cross-sectional variations. We studied the Danish corporate environmental practice, because of an institutional setting that officially supports both profit-making entrepreneurship and sustainable development. Our evidence shows, on average, quite a small extent of environmental disclosure, which implies that climate-change regulators may need to provide incentives for more extensive environmental reporting and also to alert corporate decision-makers and accountants that companies are required to report on their activities with respect to climate change under current Danish law (Act amending the Danish financial statements Act). Furthermore, our findings identify the characteristics of the companies that are least likely to implement the implementation of disclosure; the implication for policy-makers is that the implementation of disclosure regulation should target the most profitable, most levered, smaller firms which are least likely to adequately disclose the effect of their operations on the environment. Our results can be extended to other developed capitalist economies, where factors such as corporate size have also been found to explain environmental reporting both on a mandatory as well as on voluntary basis, as in the case of conforming to the principles of the Carbon Disclosure Project (Stanny and Ely, 2008). Our findings are, in part, extendable also to less developed capital markets where factors such as corporate size affect CSR practices (Imam, 2000). In the case of less developed markets, however, the analysis of CSR will have to integrate the different cultural contexts of the capitalist business enterprise and corporate accountability (Sobhani et al., 2009).

Our evidence indicates that greater visibility and economic impact, being a typical characteristic of larger companies, induces a greater breadth of environmental disclosure. Corporations that produce wealth out of intangible, non-codified value drivers are also prone to disclose information at greater breadth, thus reducing the perceived risk of major stakeholders and especially the suppliers of capital. We also discovered that as environmental reporting is costly, the liquidity constraints of companies with high financial leverage negatively tend to reduce the extent of environmental disclosure. Furthermore, we discovered that in an institutional setting that supports and legitimizes profit-seeking entrepreneurship, increased profitability weakens the incentive to achieve legitimacy through alternative means, such as environmental reporting.

Our contribution is constrained and the scope of our results is constrained by the omission of causal factors for which we had insufficient evidence, such as the degree of ownership concentration; moreover, while focusing on the breadth of environmental disclosure, this study has not investigated the discourse of environmental reporting and has not addressed the ways in which texts of disclosure signify corporate identities and social roles. Overcoming these limitations, future research should explore cross-sectional variations not only of the breadth but also of the content and meaning of texts of environmental reporting; moreover, future research should suggest regulatory frameworks that are more homogeneous, comparable, and easy to use, in a way that environmental reporting can earn credibility among stakeholders and reduce perceived risk among suppliers of capital.