Corporate environmental disclosure - International practices and implications for Vietnam

Corporate environmental disclosure is of great interest to a wide range of stakeholders including employees, customers, suppliers, creditors, governments, and the general public. A recent survey of KPMG in 2017 found that 78 percent of the world‘s largest 250 multinational companies include corporate social responsibility in their annual financial reports, and Global Reporting Initiative is the most popular framework for corporate responsibility reporting, with 75% of top 250 companies applying it. By studying a typical case study of a Swiss company and comparing environmental disclosure practices between Malaysia and Australia, the paper analyzes several factors affecting the level of environmental disclosure of public listed companies, and attempts to explain why corporate environmental disclosure in the annual reports of companies from developing countries are less extensive and less credible than those of companies from developed countries.

CORPORATE ENVIRONMENTAL DISCLOSURE -

INTERNATIONAL PRACTICES AND IMPLICATIONS

FOR VIETNAM

Nguyen Thi Hong Thuy

E-mail: thuynhkt@neu.edu.vn Vietnam National University, University of Economics and Business, Hanoi, Vietnam

Nguyen Thi Huong Lien

E-mail: liennth@vnu.edu.vn School of Accounting and Auditing, National Economics University, Hanoi, Vietnam

Abstract

Corporate environmental disclosure is of great interest to a wide range of stakeholders including employees, customers, suppliers, creditors, governments, and the general public A recent survey of KPMG in 2017 found that 78 percent of the world‘s largest 250 multinational companies include corporate social responsibility in their annual financial reports, and Global Reporting Initiative is the most popular framework for corporate responsibility reporting, with 75% of top 250 companies applying it By studying

a typical case study of a Swiss company and comparing environmental disclosure practices between Malaysia and Australia, the paper analyzes several factors affecting the level of environmental disclosure of public listed companies, and attempts to explain why corporate environmental disclosure in the annual reports of companies from developing countries are less extensive and less credible than those of companies from developed countries

Keywords: affecting factors, annual reports, corporate social responsibility,

environmental reporting

1 Introduction

Corporate disclosures can be defined as the communication of firm performance and governance to external investors and other stakeholders (Healy and Palepu, 2001) Investors are provided with material information and are protected through effective monitoring and enforcing rules Both financial and nonfinancial information should be reported and disclosed to investors so that they may compare companies across industries Moreover, adequate and credible disclosure will enhance investors‘ confidence, which may help improve liquidity and transparency of the stock market (Choi and Meek, 2011)

National differences in disclosure mainly result from differences in corporate governance and finance In the United States, the United Kingdom, and other Anglo -American countries, highly developed equity markets often provide most corporate financing In these markets, ownership tends to be spread among many shareholders,

therefore investor protection is emphasized Institutional investors play a growing role in these countries, and public disclosure is highly developed to ensure companies‘ accountability to the public On the contrary, in many other countries, such as France, Germany, Japan, and other emerging market countries, shareholdings are highly concentrated and banks have been the primary source of corporate financing Banks play the role as both creditors and owners while other insiders, such as corporate members of shareholder groups provide discipline These banks, insiders, and others are closely informed about the company‘s financial position and its activities As a result, public disclosure is less developed in these markets and differences in the amount of information provided to shareholders and creditors compared to the public may be allowed

Institutional investors often have high attention on the issue of global climate change, therefore corporate environmental performance becomes the center of corporate governance considerations all over the world The United Nations Principles for Responsible Investment in 2006 provide guidance on how to integrate environmental, social and governance issues into investment decision-making and ownership practices (UNCTAD, 2007) Companies‘ operations are related to a wide range of stakeholders including employees, customers, suppliers, governments, and the public community who have various concerns besides the company‘s financial performance

Social responsibility reporting can be defined as the measurement and communication of information about a company‘s effects on employee welfare, the local community, and the environment (Choi and Meek, 2011) In other words, social responsibility reporting is a way to demonstrate corporate citizenship Environmental issues include the impact of production processes, products, and services on air, water, land, biodiversity, and human health Sustainability reports that integrate economic,

social, and environmental performance are referred to as triple-bottom-line reporting,

or the three Ps including profits, people, and planet For a variety of reasons, many corporations show their great efforts to protect their reputations and the environment in which they do business

However, there are still arguments on social responsibility reporting Although profit measurement can be easily performed, measurement of environmental protection and social justice may be not The reason is that there is no single yardstick to compare each of the three Ps with each other Is there any tradeoff among these three factors? Despite such arguments, social responsibility reporting has been of great interest by large multinational companies A recent survey of KPMG in 2017 found that 78 percent

of the world‘s largest 250 multinational companies include corporate social responsibility in their annual financial reports, compared to only 44% of G250 in 2011 (KPMG, 2017) Choi and Meek, 2011 reveals that corporate disclosure in the annual reports of companies from emerging-market countries is less adequate and less credible than those of companies from developed countries

2 Method

By studying a typical case study of a Swiss company and comparing environmental disclosure practices between Malaysia and Australia, the paper analyzes several factors affecting the level of environmental disclosure of public listed companies, and attempts to explain why corporate environmental disclosure in the annual reports of companies from developing countries are less extensive and less credible than those of companies from

developed countries

3 Research Results

3.1 Environmental disclosure regulations in Malaysia and Australia

According to Malaysian Financial Reporting Standard no.101 ―Presentation of financial statements‖, environmental reporting is voluntary in Malaysia In addition to financial statements, many enterprises in Malaysia present additional statements such as environmental reports, particularly in industries where environmental factors are significant Under Financial Reporting Standard no 137 ―Provisions, contingent liabilities and contingent assets‖, environmental obligations should be recognized such as penalties

or clean-up costs for environmental damage and decommissioning costs of an oil installation as potential business provisions Furthermore, a joint work between ACCA Malaysia and the Department of Environment Malaysia was conducted on the production

of environmental reporting guidelines for Malaysian companies in year 2003

Australia has a mix voluntary-regulatory framework on environmental disclosures According to the Corporations Act 2001 requires that if the company‘s operations are subject to any significant environmental regulation, it should provide details of its performance in relation to environmental regulation In general, Australia has an extensive environmental legislation that can restrict or regulate companies‘ business practices that may have impacts on the environment, such as Environmental Protection and Biodiversity Conservation Act 1999, Renewable Energy Act 2000, Australian Forestry Standard 2002 and many State government‘s enforcement strategies In addition, Australian industrial companies are required to report their levels of emissions and inventories on specific substances and fuels to National Pollutant Inventory agency Furthermore, the Australian Conservation Foundation and Australian Consumer Association also initiate corporate ratings on corporate environmental performance Thus, Australia not only encourages corporations to conduct their businesses socially and environmentally but also puts some pressure on corporations to report and disclose their environmental activities

3.2 Comparisons of environmental disclosure between Malaysia and Australia

Yusoff & Lehman (2008) investigates the differences of environmental disclosure practices between Malaysian and Australian public listed companies Based on corporate annual reports of the top 50 Malaysian and Australian public listed companies, the research results indicated that Australian companies disclosed more extensive environmental information compared to Malaysian companies

Table 1 - Mean scores for environmental disclosures

in annual reports in Malaysia and Australia Environmental disclosures Malaysia Australia

1 Financial factors

Past and current environmental expenditures Nil 3.25

Future estimates of environmental expenditures Nil 3.25

Financing for environmental equipment Nil 2.67

Environmental cost accounting Nil 2.00

2 Environmental litigation

Past and present litigation Nil 3.75

(Source: Yusoff & Lehman, 2008)

(Notes: Nil - non-disclosure; 1 - general disclosures; 2 - qualitative disclosures; 3- quantitative disclosures; 4 - combination of qualitative and quantitative disclosures)

As shown in Table 1, Yusoff and Lehman (2008) research results show that none of Malaysian companies disclose environmental information in financial accounts compared

to 2.85 average mean scores made by Australian companies This result reveals that Malaysian companies fail to quantify environmental matters On the contrary, most Australian companies reported their environmental compliance in the directors report, in accordance with Corporations Act 2001 where Australian listed companies are required to report their environmental compliance

In terms of types of environmental news, Australian companies tend to report both positive and negative environmental news while Malaysian companies tend to disclose only good environmental news to public In particular, the lowest level of environmental information of Malaysian companies was environmental audit and environmental stakeholder engagement activities while this lowest level of Australian companies was environmental education programs Surprisingly, in highly developed Australia, very few corporations conduct environmental educational programs

Yusoff et al., (2013) explored and compared environmental reporting practices of companies in Malaysia and Australia, and investigated the potential factors affecting environmental disclosures in corporate annual reports Based on selected 100 companies in Malaysia and Australia to study the environmental disclosures, Yusoff et al., (2013) show

environmental information in their corporate websites Only 11% of Malaysian companies have environmental reports or other stand-alone report while this rate is 32% in Australia

3.3 Typical case study of the practices of environmental disclosure in Swiss

In Malaysian case study, no environmental information in financial terms including past, current, and future estimates of environmental expenditures, environmental cost accounting is disclosed in Malaysian companies‘ annual reports This reveals Malaysian companies fail to quantify environmental matters Therefore, a typical case study of a Swiss company, Roche, is chosen in this study to illustrate the way to quantify and disclose environmental issues in financial terms

Founded in 1896 in Basel, Switzerland, Roche has grown into one of the world‘s leading healthcare companies Since then, Roche has expanded its business activities in Germany, built a network of European and overseas agents and subsidiaries in Milan, New York, St Petersburg, London and many other cities in the world After the corporate realignment, Roche operates with four core business divisions: pharmaceuticals, vitamins and fine chemicals, diagnostics, and flavours and fragrances Recently, to intensify its focus on healthcare, Roche divests two businesses: fragrances and flavours, and vitamins and fine chemicals

According to the guidelines for sustainability reports issued by the Global Reporting Initiative (GRI), the GRI framework recommends the disclosure of performance indicators in the areas of environmental performance, such as energy consumption, water usage, and greenhouse emissions Based on the 2008 annual report of Roche, Table 2 illustrates environmental protection activities through energy use, greenhouse gas emissions, and water use Roche‘s sustainability reporting is aligned with GRI guidelines

Energy and climate change

We aim to reduce energy use and emissions of green-house gases such as carbon dioxide (CO2) from our operations

Goal: Reduce total energy consumption by 10% by 2010 from 2005 baseline

Goal: Reduce greenhouse gas emissions by 10% by 2008 from 2003 baseline (CO2 equivalent unit/sales)

Performance: In 2008, Roche used 13,662 terajoules of energy, a decrease of 2 terajoules from the previous year

Emissions from our energy use together with other greenhouse gas emissions totaled 1.06 million tonnes of CO2 equivalent in 2008, an absolute increase on 1% from

2007 This rise in emissions despite lower energy consumption is due to increased car and

plane travel

Greenhouse gas emissions

Greenhouse gas emissions relative to sales have increased this year to 23.28 tonnes per million Swiss francs of sales This equates to a total decrease of approximately 54.8% since 2003, which exceeds our 10% reduction goal by the end of 2008

Our Group strategy for decreasing greenhouse gas emissions is guided by our position paper on Greenhouse Gases and Climate Change The paper stresses the connection between CO2 emissions and energy use and we are implementing measures to reduce energy consumption and improve efficiency

The directive requires site energy audits to be carried out In 2008 we issued guidance to ensure a structured approach to these audits They can be carried out by third parties or by the sites themselves We select sites to be audited according to their circumstances and energy consumption As a result, the audits may not cover an entire site but may concentrate on a particular system We use the results to develop initiatives and goals to reduce future energy use

Water

Clean water is integral to Roche‘s manufacturing processes In 2008, we withdrew 21 million m3, for these purposes from various sources, approximately the same amount as last year

The Global Reporting Initiative defines water consumption as the water used in products, cooling and air conditioning, and irrigation We increased our consumption based

on this definition by 4.3% from 2007 to 2.4 million m3 We continually strive to reduce our water consumption globally Manufacturing processes often release contaminated wastewater as a by-product We treat wastewater to ensure it is safe for the environment and humans before we release it into watercourses We aim to increase our capacity to treat wastewater as our business continues to grow

Wastewater discharged to treatment plant (million

cubic meters)

Organic matter discharged to watercourses after

treatment (tonnes)

Heavy metals discharged to watercourses after

treatment (kilograms)

(Source: Roche 2008 annual report)

3.4 Factors affecting environmental disclosure

Disclosure practices are influenced by finance sources, political and legal systems,

Meek, 2011) Juhmani (2013) found that three factors affecting the level of voluntary disclosure of Bahraini listed firms were blockholder ownership, size and financial leverage

of firms while managerial ownership and governmental ownership were not associated with voluntary disclosures Based on annual reports of 1,066 Chinese firms listed on the Shanghai and Shenzhen Stock Exchanges, Lan et al., (2013) suggested that voluntary disclosure in China was positively associated with firm size, leverage, assets-in-place, return on equity, and was negatively associated with auditor type and the level of sophistication of the intermediary and legal environments Meek et al., (1995) based on annual reports of multinational corporations from the U.S., U.K and Continental Europe and found that company size, country or region, listing status, and industry are the most important factors affecting voluntary disclosures

Yusoff & Lehman (2008) detected several potential factors affecting environmental disclosure practices ISO 14001 certification was found to have large influence on both Malaysian and Australian companies‘ voluntary environmental disclosure ISO 14001 certification provides evidence that companies have control over their operations, commit

to comply with relevant environmental regulations, and more importantly, they are doing their best to improve their environmental performance On the other hand, Australian evidence indicated that companies with high financial performance might disclose more environmental information In other words, there is possibly a positive relationship between environmental disclosures and corporate financial performance

4 Implications for Vietnam

Since the foundation of the State Securities Commission (SSC) in 1996, Vietnam stock market has been operating for more than 20 years According to SSC‘s statistics, market capitalization in 2017 reached VND3.36 trillion, equivalent to 74.6% of Gross Domestic Product Although the level of disclosure of listed companies in Vietnam has been improved compared to previous years, practices of corporate disclosure in Vietnam are less extensive and less credible resulted from information asymmetry

According to a recent survey of Vietstock (2017), only 114 listed companies fully followed information disclosure requirements on both Hochiminh and Hanoi stock exchanges, equivalent to 16.69% over the total surveyed 672 companies Vietstock‘s survey report in 2017 provides details of common violations of information disclosure criteria of listed companies on the Vietnamese stock market First, criterion of disclosing financial statements was violated by more than 30% of total surveyed companies Second, violation rate of disclosing resolutions and meeting minutes of annual general meeting of shareholders was nearly 30%, and criterion of disclosing managerial reports was violated

by 23% Finally, violations of other criteria included stocks under control or being warned, being reminded or sanctioned by State administrative agencies, stock transfer violation For voluntary disclosures, for example, regarding criterion of disclosing misstatement reporting policy, no listed company mentioned this policy in their annual reports during the two years 2015-2016 This reflects the corporate responsibility of disclosing information voluntarily of listed companies in Vietnam is not good

Investors and other stakeholders would expect a wide range of variation in disclosure levels of listed companies on the stock market Although managers need to

consider the costs of disclosing corporate information, both mandatory and voluntary disclosures are becoming more stringent in the world Credible disclosure will increase investor confidence, facilitate liquidity, and reduce transactions costs for listed companies

In order to protect investors and other stakeholders, it is essential to determine and measure the impacting factors on the level of disclosure in general and on environmental disclosure

in particular so as to enhance the transparency of the stock market in Vietnam

From investors‘ viewpoint, investors are the first victims to suffer the consequence of disclosure violations of listed companies Investors should be equipped with the knowledge of the regulations and the best practices on disclosure of environmental information Investors need

to proactively read the assessment report on disclosure by independent organizations such as Vietstock reports Based on these independent reports, investor will be able to classify listed companies for investment decisions to avoid unnecessary risks

5 Reference

1 Choi, F D S., Meek, G.K (2011) International Accounting 7th Edition, Pearson

Education, Upper Saddle River, NJ, USA

2 Frost, C.A., and Lang M (1996) Foreign Companies and U.S Securities

Markets: Financial Reporting Policy Issues and Suggestions for Research Accounting

Horizons 10

3 Healy, P.M., and Palepu K G., (1993) The Effect of Firms‘ Financial Disclosure

Strategies on Stock Prices Accounting Horizons, 1-11

4 Healy, P M., & Palepu, K G (2001) Information asymmetry, corporate

disclosure, and the capital markets: A review of the empirical disclosure literature Journal

of accounting and economics, 31(1), 405-440

5 Juhmani, O (2013) Ownership Structure and Corporate Voluntary Disclosure:

Evidence from Bahrain University of Bahrain International Journal of Accounting and

Financial Reporting, 2:133-148

6 KPMG (2017) The KPMG Survey of Corporate Responsibility Reporting

https://home.kpmg.com/content/dam/kpmg/campaigns/csr/pdf/CSR_Reporting_2017.pdf

on Mar 20, 2018

7 Meek, G.K., Roberts, C.B., Gray, S.J (1995) Factors influencing voluntary annual report disclosures by U.S., U.K, and continental European multinational

corporations Journal of International Business Studies, 26(3), 555-572

8 Yusoff, H., Othman, R., & Yatim, N (2013) Environmental reporting practices in

Malaysia and Australia Journal of Applied Business Research, 29(6), 1717-1726

9 Yusoff, H., Lehman, G (2008) International Differences on Corporate Environmental Accounting Developments: A Comparison between Malaysia and

Australia Accounting and Finance in Transition Greenwich University Press, 92-124

10 United Nations Conference on Trade and Development (UNCTAD) (2007)

Review of the Implementation Status of Corporate Governance Disclosures: An Inventory

of Disclosure Requirements in 25 Emerging Markets Intergovernmental Working Group