Non-financial Information Disclosures and Environmental Management

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Reporting, in general, refers to a way of presenting information about a company’s performance (Walden & Schwartz, 1997). However, for financial reporting, the reports may include financial position status, profits, and cash flows. Such reports are essential to a wide range of users, for instance, stakeholders, regulators, and investors. On the other hand, non-financial disclosures, which are also termed as sustainability reporting refer to the practice of measuring, disclosure and being accountable to both external and internal stakeholders on issues of organizational performance in line with the objective of both inclusive and sustainable development.

Sustainability refers to a situation where the business has to be carried out in a sustainable profitable manner such that it does not cause undue pressure to its surrounding (Healy, Hutton, & Krishna, 1999). Since the industrial revolution, there has been a general perception that economic evolution came at a cost to the environment bringing large scale destruction to our environment while at the same time, the growth processes meant to be achieved has not been all-inclusive.

Due to this perception of harsh economic conditions associated with economic development, the business fraternity responded through the practice of non-financial reporting in a bid to ease the pressure leveled by non-governmental organizations (NGO’s) and civil society which argued that firms neither practiced social nor environmental responsibility. As such, corporate financial wellness should be based on sustainability reports other than its assets as presented in a balance sheet and the movement, as shown in the profit and loss account. Non-financial reporting allows firms the opportunity to express to the stakeholders transparently and openly, the measures employed to conserve the environment in which the firm exists.

In the non-financial reports, firms express an overview of their social and environmental impact in the past year. Such disclosures contribute immensely to building up the company’s risk-return profile. This paper evaluates how mandatory non-financial reporting standards could improve non-financial reports and how the implementation of such standards could contribute to better management of environmental risk (Vogel, 2005).

The need for sustainability reporting

It is worth noting that the parameters for corporate evaluation have changed over the years, from the point where the business was organized as a sole proprietorship or partnership. At this point, returns were the sole indicator of business performance unlike in the 21st century, where corporate performance is currently judged by market capitalization, financial ratios such as Earning per Share (EPS), Returns on Equity (ROE) and market capitalization amongst others (Hirst, Koonce & Paul, 1998). In this context, one of the most important parameters to be evaluated in sustainability reporting would be the value created by the firm for the society and whether such value would be enduring in nature.

In this regard, sustainability reporting is considered very important especially to financial institutions due to their highly leveraged status and their key role in dealing with public resources which demand a lot of public confidence. According to Ittner and David (1998b), the importance of sustainability reporting has become more relevant in today’s context as it became evident that mere business growth and profitability are not only today’s business goals, but for the growth to be achieved, it should be all-inclusive. However, if the growth trend is not equitable, then it cannot be sustainable (Patel, 2010).

The reporting framework

Based on the previous research, the structure of sustainable reporting has significantly changed over time. Whereas the early form concentrated on environmental indicators, the current reports are more comprehensive as they also cover social as well as economic risks, thereby having a triple line reporting format (Chottinger & Young, 1971). However, reporting framework keeps on evolving. As such, an organization does not have to wait before adopting a framework.

To harmonize the different standards that evolve every other single day, a body referred to as Global Reporting Initiative (GRI) was formed to standardize the numerous non-financial reporting standards adopted by different institutions (Amir & Lev, 1995). A global reporting initiative as a long-term multi-stakeholder was formed to come up with globally applicable non-financial disclosure guidelines. Such guidelines would help in understanding and articulating the contributions of the reporting organizations to achieve sustainable development (Parker-Pope, 2008).

The Mandatory standards

According to Brennan and Hughes (1991), a significant number of stakeholders called for sustainability reporting to be mandatory as they believed that most companies would not report their own accord, or if they do, the report would not be sufficient and would not properly address stakeholder’s interests. One of the good examples of a mandatory approach is France Government Regulations Economiquees which requires all companies listed in the stock exchange to include environmental and social information in their annual reports (Amir & Lev, 1996). However, this legislation does not give certainty on the quality of reports and does not influence the company’s performance.

A survey done by a Paris based consulting firm Utopies established that most firms forming 120 most actively traded stocks in Paris ignored this requirement and two-thirds of the firms reported on less than 40% of the given indicator. Instead, only 10 blue chips companies attempted to comply with the spirit of this sustainability reporting law (Rogers, 2004).

Regarding mandatory environmental disclosures in both Canada and the United States of America, it has been pointed out that firms provide insignificant information on environmental issues about the set standards (Fama & Laffer, 1971). Though firms have been advocating for voluntary disclosure, non-governmental organizations, trade unions, and civil society joined hands to demand mandatory standards since they believed that companies will never disclose material information unless they are compelled by law. As such, they argued that mandatory non-financial standards could improve non-financial reports as outlined below.

Non-financial reports prepared based on recognized tools and practices or based on recognized guidelines enhance the credibility of information provided, thus serving the stakeholder’s concerns and interests (Kaplan & Norton, 1992). In addition, mandatory requirements ensure transparency and openness for sustainability reporting which is not common in financial reporting. More importantly, Mandatory requirements ensure that amongst the agenda of the corporate reporting, they also conclude corporate social responsibility issues, environmental and social issues (Murray, 2005).

Though companies advocated for voluntary disclosure, Eagly and Chaiken (1975) noted that many firms would fail to address some fundamental issues such as aspects of the company’s environmental performance and human rights issues. Nonetheless, firms tend to put more emphasis on positive information in most sustainability reports. Companies also ensure that these reports tend to be event and time specific. As such, a firm may disclose the report when it tends to suit its interests, unlike when it may negatively impact people’s perception or affect the firm’s future cash flows and potential earnings (Kaplan & Norton, 1993).

Despite NGO’s calling for mandatory intervention, businesses are also advocating for government intervention to ‘level the playing ground’. This is after the emergence of litigation over the alleged claims that firms are marketing themselves through public reports (Eagly, Wood, & Chaiken, 1978). In the United Kingdom, there have been efforts to redefine the term materiality under company law. This saw the replacement of the materiality concept with operating and financial review to incorporate reports on non-financial issues to the desired extent.

Libby, Bloomfield, and Nelson (2002) pointed out that, corporate social responsibility leads to superior corporate returns and social welfare in the long-term. As such, disclosure and reporting on material sustainability issues form crucial information for investors while selecting investments to commit their funds. In this regard, it can be concluded that market and economic forces drive companies to report on sustainability performance.

Set guidelines on sustainability reporting would be advisable where the market for information to be disclosed is characterized by market failure (Macey, 2002). Market failures arise due to harsh economic conditions, production of public goods, the dominant position of market participants and information asymmetry. In such cases, the investor will be willing only to invest if he is adequately compensated for bearing a potential economic risk. However, companies will probably disclose and report in the interest of maximizing their returns (Zadek, 2004).

Mandatory disclosure also had an advantage of standardization as argued by Hibbitt, & Collison, (2004). An investor will always compare the number of investments available before settling on one. As such, it becomes easy if the required information is presented in a standardized format that is comparable. Standardized reports save the investor time, money and explain why annual reports or listing prospectus need to follow identical guidelines (Gunningham, & Grabosky, 1998).

With legally required corporate disclosures, the investors are accorded equal treatment concerning information disseminated under the guidelines, unlike voluntary disclosures where some investors are privileged in information disclosure while prejudicing others. Lastly, mandatory non-financial disclosure ensures the availability of information at a single central point for the investors, helping avoid duplication and waste of time in inefficient search for information about public companies.

Nonetheless, care should be taken not to erode the government ability to intervene as it can aid in playing an important role in terms of creating a favorable environment for companies to disclose non-financial information (Baums, 2004). This can be achieved through encouraging reporting, for instance through taking part in debates about non-financial disclosures, conducting national peer reviews or issuing the country’s specific reporting guidelines.

How the implementation of mandatory non-financial reporting standards contributes to better management of environmental risk

Buhr and Freedman (2003) define environmental risk as potential or actual threat of adverse effects on the environment and living organisms by effluents, wastes, emissions and resource depletion amongst other causes – all arising from organizational activities. On the other hand, Heider (1958) refers to environmental accounting as identification, estimation, compilation and analysis of environmental costs data for better decision making within the organization.

In other words, it can be referred to as generation, analysis, and use of financial and non-financial information to maximize the firm’s environmental, corporate and economic performance to achieve sustainable business (Kent & Martinko, 1995). It should be noted that the ultimate goal of environmental accounting is to express the environmental cost of each process, clearly separating the environmental costs from non-environmental ones. Environmental accounting brings the environmental cost to the attention of managers, thus motivating them to produce ways to reduce if not to avoid economic costs related to the environmental risk, while at the same time reducing the company’s environmental impact.

Companies should disclose all material information as environmental information is of material importance. There are specific disclosure requirements that have been classified through published accounting standards. These disclosures encompass matters such as the cost of compliance with environmental regulations, liabilities associated with restoration of contaminated property, and damages that may result from environmentally related legal actions (Wallace, 1980).

With the implementation of mandatory standards, the security regulators and environmental authorities will have adequate information that will enable them to deal with their growing and increasingly complex responsibilities. Armed with the necessary information, these agencies will be in a position to carry out a thorough environmental assessment, to establish the extent to which firms are degrading their surroundings and the mechanisms they have employed to prevent such degradation. As such, the authorities will easily establish whether the organizations are meeting the set benchmarks, or if their efforts will surpass such benchmarks.

Areas covered by environmental standards.
Fig. 1.1 Areas covered by environmental standards.

Planning & Assessment

At the planning and assessment stage, the standards are formulated with the intent of providing high-level protection of the environment and contributing to the integration of environmental concerns in the preparation and adoption of plans to promote sustainable development. At operational impact on quality, firms should prevent, reduce and eliminate pollution at the source through efficient utilization of natural resources. The last stage of waste and recycling encompasses waste management which requires formal authorization to dispose of waste. At this stage, waste recycling is heavily encouraged as it tackles the possibility of water and soil pollution.

Compelling firms to make disclosures will also ensure that the necessary information is available to the investors who in most cases make investment decisions under time pressure. As such, the investors can make more informed decisions as they are in a position to compare many company’s reports from which they can get the trend of environmental risk prevailing at a given period. Full disclosures will also help in protecting consumer rights (Eccles et al., 2001).

This can be achieved through fielding consumer complaints and developing consumer education programs. Through these, the concerned agencies develop a culture of transparency and good governance that will help prevent environmental scandals before they happen. In addition, the availability of information will improve the availability, clarity and accessibility of non-financial information to the consumers. As such, they become well- aware of how the firms are conserving the environment, which has provided them with a place to be. Consumers can establish, which organizations are environmentally friendly and those that harm the environment in which they exist.

More so, information disclosure will show if the concerned firms are abiding by the laid down codes, in a bid to conserve their very own environment. Mandatory disclosures compel firms to provide non-financial information as they release their financial information. Through this, the firms provide crucial information regarding the environment that government may use to provide incentives to the firms, which has put in place better mechanisms to conserve the environment. These incentives serve as a reward to such companies, thus motivating others to follow the same trend. Implementation of policy guidelines leads to a more inclusive and accurate policy framework that is easier for the consumers to understand, for the authorities to implement, and for the industry to comply out of which the society in general benefits.

Policy guidelines require the firms to give comparative information on financial and non-financial reports. As such, the authorities can assess the pollution caused to the environment by the firms while at the same time evaluating the corrective measures put in place to deal with such problems that may occur in the future. Firms are compelled to come up with alternative ways of disposing of hazardous materials that tend to harm the environment in which the firm operates, or else operate in such a way that does not cause damage to the environment (Eyers, 2010).


Despite Non -governmental organizations and civil society vigorously advocating for mandatory standards requiring firms to include non-financial reports amongst other financial reports, not much has happened on this front, though on the all-inclusive front, remarkable progress has been achieved – despite non-incorporation as part of non- financial disclosures. To make an impact on this front, firms are advised to integrate the concept of non-financial disclosures and risk management processes for performance assessment, corporate social responsibility and non-financial reporting with their business strategy. However, as society begins to reward and judge business performance based on their environmental, social and all-inclusive growth agenda, businesses will be more motivated to adopt non-financial disclosures even without doing so merely to conform to the standards.



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