ACC30008 : Accounting Assessment - Senate Inquiry into Carbon Risk Disclosure

Accounting Assessment

Case Scenario/ Task

On 2 February 2016, the Australian Senate referred an inquiry into carbon risk disclosure to the Senate Economics References Committee for inquiry. The Committee is to report in June. The Inquiry’s terms of reference include the following five areas for consideration:

1. current and emerging international carbon risk disclosure frameworks

2. current carbon risk disclosure practices within corporate Australia

3. Australian involvement in the G20 Financial Stability Board discussions on carbon risk impacts for financial stability

4. current regulatory and policy oversight of carbon risk disclosure across government agencies and

5. any other related matters.

Carbon risk disclosure requirements are varied both industry as well as nation wise, so it is important to understand the cause of this variation in order to do away with the variation and adopt a uniform and comprehensive carbon risk disclosure policy framework.

The report provides a review of the scholarly research literature available on this topic primarily supporting the stakeholder theory as per the Senate Inquiry’s terms of reference and provides insights and recommendation to the Committee. The stakeholder theory is based on the premises that corporate that manages stakeholder relationships effectively will survive longer and perform better by committing and addressing strategies that address stakeholders concerns.

Discussion

Approach

Disclosure requirements are varied both industry as well as nation wise, so it is important to understand the cause of this variation in order to do away with the variation and adopt a uniform carbon risk disclosure policy framework. Most importantly, it requires a non conceited approach by nations to identify the pollution severity measure by including risk perception in their disclosures. Related risks may be objective as well as subjective. The identified causes of variation as per research by Fisk and Jonathan M lie in the strategic method of disclosing the information, political and economic environment of the nation, the degree of media awareness and approach on the issue. The research also suggests a positive relationship between the disclosure and consistency of the carbon risk profile and behavioural change in the target population. These research findings may be very useful in designing the future disclosure framework. (Fisk, 2013)

Factors affecting disclosure and recommendations thereof

A study conducted in UK for the identification of the factor influencing a corporate success in attaining environment related accolades and awards were conducted on a sample of UK FTSE 100 companies. Specifically pointed and relevant to our purpose of researching literature on carbon risk disclosure; it may be pertinent to note that the degree of presence of environmental management system; stakeholder engagement; and disclosure on behalf of specific functional environmental areas like waste management, climate change risk, and climate change activities particularly were found to be positively correlated to the receipt of an environmental award. It was also concluded that the level of environmental disclosure and the strong chances of getting an award are positively influenced with industry membership. The reason is attributed to the varied and huge differences in the disclosure of environment related information for different industries. It was observed that companies from carbon-intensive industries have better probability of receiving an award in comparison to other industries. Not much correlation was found to exist between external assurance and other environmental activities with the receipt of the award. (Hassan and Ibrahim, 2011)

Today, the aware stakeholder of a corporate around the globe is very much concerned with their company’s interaction and friendliness with the environment. They are keen on being informed about the environment protection and pollution prevention measures and activities with reference to their companies. Companies today consciously attempt to enhance and strive to maintain this stakeholder trust by the disclosure of environmental information to the highest degree possible. By conferring prestigious environmental awards; these companies strive for increasing stakeholder acceptance. This research throws important light on the oversight in relation to the factors identified by this study in relation to the current regulatory and policy framework for carbon risk disclosure across government agencies. Further it is believed and recommended that the emerging international carbon risk disclosure framework ought to consider these factors. This would not only ensure a uniform global acceptance of the framework but would achieve the goals of the committee in reducing the questioned risk to the minimum. (Hassan and Ibrahim, 2011)

It is also relevant from the point of view of emerging framework to investigate and pen down methods of stakeholder engagement, and the extent of divergence of these methods so as to increase uniformity in general. The policymakers and government will also be in a position to identify companies that are more likely to achieve environmental awards. The quality of the disclosed information and the effect of variables like company culture, company size and structure, applicable corporate governance framework also need to be researched and correlated with the environment award and consequent disclosure effect so as to make the new framework more inclusive and comprehensive. (Hassan and Ibrahim, 2011)

It is also important to identify reasons at this juncture that would determine causality of the risk disclosure with the much desired behaviour change. A research work attempted to identify just these causes and broadly categorized them into internal and external. By inculcating the culture of measurement of emissions; organizations would be converged to think on the development of the strategy in terms of better insight and action. As the framework advances and data quality improves, the comparability of the information will not only help to drive home best practices but also bring about a noticeable change in the investor behaviour. This was evidenced in the research work by 3700 plus companies in 2011. It is expected that benchmarking will pick up as data and software improve which will in turn drive investor using more and more of this data. (Topping, 2012)

The effects on climate change and water availability are identified factors in this area for corporate financial performance. These are no longer compliance issues left to the vigilance of the corporate compliance team but are being adopted by smart CEOs who wish to climb up the regulatory and accounting learning curves ahead of others. Even though the disclosure still need more absorption time, company heads and management are wise enough today to understand the long term impact of their environmental behaviour on the stakeholders. It is then understood that what needs to be developed is not acceptance of these corporate but rather a simplistic, comprehensive and all inclusive framework. (Topping, 2012)

Investigation of the effectiveness of the Carbon Disclosure Project (CDP) has also aided the facilitation of environmental disclosures of corporate and served as a corporate governance mechanism for the stakeholders making them able to influence the corporate environmental disclosures. Research on 319 Canadian companies proves that management’s disclosure of climate change data has more to do with the domestic rather than foreign investors. Also, disclosure is more forthcoming from low pollution industries. This literature research may be of some use while enacting the new disclosure guidelines in as it suggests that stakeholder activism may not be successful at altering the behaviour of the heavy polluters. (Wegener et al., 2013)

Another area of relevance in this regard is the securities litigation contribution to inculcate disclosure by the listed corporate on the climate changerisksto their stakeholders. This mandating can act as a strong catalyst for companies keen on managing greenhouse gas emissions and other carbon related risks. Regulators in North America have shown strong resistance to this obligation which led to the Office of the Attorney-General in New York entangling them into litigation. So linking the carbon risk disclosure and the securities litigation may increase the possibility of global acceptance to great extent. The success of resorting to lobbying regulator and shareholder resolutions have their own limitation and may be considered less effective to the mandatory regime As in Ontario, the Securities legislation makes the issuer liable for damages where misrepresentation of the carbon risk disclosure is resorted to. This civil liability can be invoked even where no loss was suffered by the stakeholder suing the company. However, liability can be avoided where exercise of proper due diligence is proved. A strong carbon disclosure regime clubbed with the possibility of litigation may result in better disclosures of carbon risks in terms of quantity and quality aided by the security regulator. (Erion, 2009)

Research by Hahn, Rüdiger; Reimsbach, Daniel; Schiemann and Frank provides evidence that larger corporate from countries that were signatories to the Kyoto Protocol are more likely to voluntarily provide carbon disclosures. Even though change regulations often insist that increased carbon disclosures positively contribute to the corporate and the environment, no empirical correlation has been so far established. In order to study the effect of these disclosures on carbon risk more extensive research is required in regard to the disclosure measures as well as the methods. This will also put to rest the controversy over voluntary and mandatory disclosure regimes against the goal of ensuring transparency. (Hahn, Reimsbach and Schiemann, 2015).

Conclusion

The identified causes of variation in risk disclosure are the strategic method of disclosing the information, political and economic environment of the nation, the degree of media awareness and approach on the issue, the disclosure and consistency of the carbon risk profile and behavioural change in the target population. Disclosure on behalf of specific functional environmental areas like waste management, climate change risk, and climate change activities and industry membership particularly were found to be positively correlated to the receipt of an environmental award.

The quality of the disclosed information and the effect of variables like company culture, company size and structure, applicable corporate governance framework also need to be researched so as to make the new framework more inclusive and comprehensive. It is expected that benchmarking will pick up as data and software improve which will in turn drive investor using more and more of this data. It is then understood that what needs to be developed is not acceptance of these corporate but rather a simplistic, comprehensive and all inclusive framework so as to achieve the goals of the committee in reducing the questioned risk to the minimum. A strong carbon disclosure regime clubbed with the possibility of litigation may result in better disclosures of carbon risks in terms of quantity and quality aided by the security regulator.