A Study of Corporate Environmental Disclosure Practices of Companies Doing Business in India

Abstract

There is a growing pressure from the stakeholders, particularly government and international funding agencies, to publish environmental reports. Environmental reporting and disclosure practices are a means of communicating to the stakeholders about the impact of the organization’s actions on the environment. The reporting can be done in the form of financial or non-financial reporting. We have conducted a study on 50 companies on the basis of turnover from the list brought out by ET 500. We have studied the environmental disclosure practices of Indian companies and also the impact of different independent variables on environmental disclosure index (EDI). Based on a review of literature, we have classified the independent variables according to profitability, size, type of industry, financial leverage, multinational status and environmental certification. We have constructed year-wise pooled regression model with EDI as dependent variables and profitability, size, type of industry, financial leverage, multinational status and environmental certification as independent variables. We find that in all the four years, size and environmental certification are statistically significant at the 1 per cent level and are positively associated. This indicates that bigger-sized companies and the environmentally certified companies by an external agency disclose more environmental information. Environmental certification reduces the agency cost as it reduces the monitoring cost since the firms voluntarily follow an external set of measured objectives. No other variable was found to be significant.

Keywords

Environmental disclosure index ET 500 environmental regulations

Introduction

There is a growing pressure from stakeholders, particularly government and international funding agencies to publish environmental reports. Environmental reporting and disclosure practices are a means of communicating, to the stakeholders, about the impact of the organization’s actions on the environment. Raghu Raman (2006), in his research paper, says that the role of business in society has undergone a vast change and the business houses have started realizing the fact that being socially responsible is critical for survival. The reporting can be done in the form of financial or non-financial reporting. Environmental information is provided in the financial report or annual report of the company or the company can bring out a sustainability report too. In India there are certain regulatory requirements of reporting about environmental disclosures. Sahay (2004) conducted a research on the reporting practices of Indian companies and found out that environmental reporting in India is unsystematic, piecemeal and inadequate due to poor environmental awareness of the stakeholders. He concluded that the prevailing environmental regulation needs rigorous enforcement and implementation. Malarvizhi and Yadav (2008) conducted a study on environmental disclosure practices by Indian companies and the study revealed that the sample Indian companies reported only positive environmental information with virtually no disclosure on their adverse or negative environmental performance. They recommended that there should be more qualitative disclosure in the form of environmental policy, health, safety, environment, water and waste management, sustainability and environmental initiatives and energy management practices. Environmental disclosure is more prevalent among the manufacturing sector as against non-manufacturing companies in India. In the year 2011, the Ministry of Corporate Affairs, Government of India, brought out ‘National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business’. These guidelines contain comprehensive principles to be adopted by companies as part of their business practices. The Ministry has also prescribed a structured business responsibility reporting format requiring certain specified disclosures that shows the steps taken by companies to implement the comprehensive principles. Taking into consideration the larger interest of the public, the government has mandated the top 100 listed entities based on market capitalization as on 31 March 2012 at the two major national stock exchanges, namely, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) to include Business Responsibility Report along with annual report.¹

Craighead and Hartwick’s (1998) research says that disclosure strategy is a key value-creation tool. Disclosure strategy’s scope and scale has broadened from disclosure of financial information to disclosure of other information, such as, environmental, corporate governance, technology and other non-financial information. Research suggests that an open-disclosure policy provides many benefits to a firm, and particularly lowers cost of capital (Botosan, 1997; Lev, 1992). Within the scope of a firm’s disclosure strategy, environmental disclosure typically occupies a prominent place (Beets and Souther, 1999).

Environmental Regulations in India

In the Indian constitution, environmental protection has been included, which states that it is the duty of every citizen to protect and improve the natural environment including forests, lakes, rivers and wildlife. In India, the Ministry of Environment and Forests (MOEF) is the apex body responsible for (a) the conservation and survey of flora, fauna, forests and wildlife; (b) prevention and control of pollution; (c) afforestation and regeneration of degraded areas; (d) protection of the environment; and (e) ensuring the welfare of animals. The central government of India has enacted a number of acts for environmental protection. These acts are available on the website of MOEF. Some of these acts are:

The Water (Prevention and Control of Pollution) Act, The Air (Prevention and Control of Pollution) Act, The Environment (Protection) Act, separate acts related to forest conservation, wildlife protection, biological diversity, and acts relating to public insurance that provide for public liability insurance to the persons affected by accidents occurring while handling any hazardous substances.²

Green Image Tag: Reasons for Companies Disclosing Environmental Activities

Do organizations having a win–win situation by becoming environment-friendly? Toms (1999) says that environmental consciousness or carrying a green image tag is not only essential from social point of view but studies have shown that ‘green’ image fare better in the consumer market and stock market. By adopting environmental accounting, companies not only save cost but also create global image (Chaklader, 2001). There are some who believe that going green is costly but many believe that capital market and consumers appreciate green companies and therefore environmental performance should have positive effects on financial performance. There are three ways by which environmental information can be conveyed to stakeholders. By way of certification of products, firms, processes or management procedures by third parties, for examples, eco label certification, ISO certification. The second type is self-certification without any fixed criteria or any externally independent review, for example, corporate social responsibility reports published by companies. The third type is to get recognition in terms of ratings or environmental awards (Lopez et al., 2004).

Number of research studies has been conducted linking the rationale of environmental disclosure with legitimacy theory and agency theory. Legitimacy theory was developed by Neu et al. (1998) and Prabhu (1998). They mention that business organizations must consider the rights of the community at large and not only the investors. Ignoring the community will force the community to act to remove the operational rights of the business organizations. Neu et al. (1998) also mention that it is easier to manage an organization’s image through environmental information disclosure. Legitimacy theory implies, given a growth in community awareness and concern, that firms will take measures to ensure their activities and performance are acceptable to the community. Anbumozhi et al. (2011) reviewed the economic and legitimacy theory behind information disclosure and concluded that factors that contributed to widespread success of selected programmes in the People’s Republic of China, India, Indonesia, the Philippines and the United States are information quality, the dissemination mechanisms, provision of incentives for good performers, and public and private pressure. Deegan and Rankin (1996) opined that if the company fails to comply with the expectations of the society, it is heading towards its end.

Another important theory is agency theory which considers environmental reporting as a consequence of conflict between principal and agent. An agent is a person who is hired by the principal to carry out the functions assigned to him. In case of a company, principals are the shareholders of the company and the CEO/Directors are the agents. There are a large number of shareholders who do not directly participate in the functions of the company. Therefore, they rely on the agents to conduct the functions in a rational and diligent manner and they are accountable to the shareholders. There are number of regulations to monitor the agents to ensure a good corporate governance practice. Environmental disclosure is done by the agents voluntarily or as a regulatory requirement to inform the principals about the environmental practices and activities about the company. The agents may not act in the best interest of the principal which may result in a conflict between the principal and the agent. There is a need to monitor that agents are acting in the interest of the shareholders and therefore there is a monitoring or agency cost. Agency theory sees environmental reporting as a consequence of conflict between principal and agent. Agency cost can be reduced by disclosure of environment-related information.

Environmental Information Disclosure: Review of Literature

Shane and Spicer (1983) found out that the organizations which were identified as having low pollution-control performance rankings were more likely to have significant negative stock returns relative to organizations with higher pollution-control performance. They concluded that corporate disclosure diminishes informational asymmetries between the firm and its stakeholders. Through corporate disclosure the stakeholder’s perceptions about the future of the firm are influenced. Environmental disclosure is taken as a as a pre-emptive step to mitigate adverse regulatory or legislative pressures in the future (Shane and Spicer, 1983). Ingram and Frazier (1980) examined annual reports of 40 companies to analyze the association of a company’s environmental disclosure with its environmental performance. The results of their study indicated a weak association between quantitative measures of disclosure content and independent measures of social performance. They explained that this weak association may be due to lack of external monitoring of firms’ social disclosures. They opined that since management can use its own discretion in selecting information to be reported, it is possible for poorer performers to bias their selections in order to appear like the better performers. This explains why explain why investors tend to discount such information.

Deegan and Gordon (1996) conducted a study of the environmental reporting disclosures made by 197 companies representing 50 industries in the annual report of the year 1991. They found out that only 71 companies provided with voluntary environmental disclosures, and 14 of 71 companies provided negative disclosures. They also found that firms in industries that appeared to be environmentally sensitive provided greater positive environmental disclosures. Thus they concluded that there is low voluntary disclosure of environmental practices in Australia. Deegan and Rankin (1996) investigated the environmental reporting practices of a sample of 20 Australian companies which were subject to successful prosecution by the New South Wales, and Victorian Environmental Protection Authorities, during the period 1990–1993. Their study indicated a significant increase in the reporting of favourable environmental information surrounding environmental prosecution. They concluded that organizations appear reluctant to provide any information within their annual reports about any negative environmental implications of their operations which was applicable for both prosecuted and non-prosecuted firms. Those firms that had been prosecuted provided significantly more positive environmental disclosures than their counterparts that had not been prosecuted.

Gray et al. (2001) took a sample of 100 UK companies drawn from the Center for Social and Environmental Accounting Research (CSEAR) and observed that the volume of disclosure is related to the turnover, capital employed number of employees and profit. They also found out that larger and more profitable firms disclosed more environmental information. Fortes (2002) conducted a study in Sweden to find out the significance of environmental reporting and observed that environmental reporting showed positive benefits to businesses. He also says that there is a perception that greater environmental disclosure leads to increase in cost, thus lowering profits but in actuality its advantages outweigh cost.

Sarumpaet (2005) conducted a study on 87 Malaysian companies and found that financial performance is not significantly associated with environmental performance but the variables such as company size, stock exchange listing and ISO 14001 certification are significantly associated with environmental performance.

Hossain, Islam and Andrew (2006) researched on 107 non-financial companies listed on the Dhaka Stock Exchange to test the association between a number of corporate attributes, such as, size, type of industry, net profit margin, presence of public debenture and the extent of social and environmental disclosure in company’s annual reports, for a developing country, Bangladesh. Results of the multiple regression analysis showed that corporate environmental disclosure levels are associated with some company characteristics. The variables those were found to be positively significant in determining disclosure levels were the nature of the company, presence of debentures in the corporate annual reports and the net profit margin.

Singh and Joshi (2009) conducted research on environmental reporting by taking a sample of 500 companies from the BSE. They concluded that environmental reporting is yet to find a permanent position in the financial sections of the annual report. They also found that there existed a positive relationship between the profitability, size of the company and environmental disclosures score (EDS). They noted that there is an increasing trend in EDS, indicating that the companies in India are becoming more enlightened about corporate environmental disclosures. Joshi and Suwaidan (2011) examined the factors influencing the level of environmental disclosure information from a sample of 45 Indian industrial listed companies. The research showed that there is a low level of environmental disclosure. Their analysis showed a positive association between log of total assets, and industry type with the disclosure index. They found that large-sized firms which are heavily polluted had a tendency to disclose a higher level of information and profitability and financial leverage had no impact on the disclosure level. They also concluded that environmental disclosure practices by Indian companies are of a casual nature. Pahuja (2009) conducted research on large manufacturing companies in India to study the relationship between environmental disclosure with sector, nature of industry, foreign association, control, size, profitability, leverage and export. She conducted the study in two phases. In the first phase, she constructed an EDS index consisting of 23 items of environmental information by taking the opinions of 200 chartered accountants who rated the items on a scale of 0 to 4, 4 representing maximum importance. In the second phase, she used an EDI to evaluate environmental disclosure practices of large manufacturing companies in India for three consecutive years from 1999–2000 to 2001–2002. She used multiple regressions and found that public sector companies and environmentally sensitive companies had a higher disclosure score. The coefficients of other two dummy variables depicting foreign association and association with large business houses were not statistically significant. Variables such as size, profitability and environmental performance were significant in explaining variation in environmental reporting practices of the sample companies.

Environmental reporting is essential for corporations, as it serves as an indicator for corporate consciousness through a moral disclosure on environmental issues and it has become important for corporations to do environmental reporting as it depicts their corporate consciousness (Sumiani, Haslinda & Lehman, 2007). Empirical studies have shown that environmental disclosure activism varies across companies, countries, industries and time (Gray et al., 2001; Hackston and Milne, 1996). Brammer and Pavelin’s (2008) findings show a high quality disclosure was primarily associated with larger firms and those in sectors most closely related to environmental concerns. They found that there existed a highly significant positive effect on firm size but no significant effect on leverage or profitability. They also found that the extent of a firm’s media exposure had no significant effect on its propensity to disclose an environmental policy. Wu et al. (2010) conducted a study on 100 S&P firms from the year 2004 to 2008. The results showed that environmental disclosures have a negative impact on firm performance. It suggests that increased environmental disclosure could mean more environmental problems faced by the firm resulting in political and remediation costs which can negatively affect the firm’s financial performance. The study also found that firm performance and leverage can negatively affect environmental disclosure, implying that well-performing and highly leveraged firms may have better compliance with environmental laws and regulations.

Clarkson, Overell and Chapple (2011) conducted a study on 41 Australian firms and showed that size, pollution propensity and capital intensity measure by ratio of capital expenditure to total sales volume for the year were significant and positively associated with EDS.

Galani et al. (2011) conducted a study on 100 biggest Greek companies. They constructed an EDI with the help of 15 items of information, in order to identify the factors that may have a significant influence on the disclosure level of environmental information by Greek companies. They identified their dependent variables as size, profitability and whether the company is listed in the stock exchange. Their results that size (log of total assets) was statistically significant for a confidence level of 95 per cent. Size displayed a positive effect on the dependent variable. The remaining independent variables such as profitability and listing on Greek stock market had a statistically non-significant effect.

Suttipun and Stanton (2012) researched on 75 Thai-listed companies to know the association between EDI and the variables such as size, domestic or international origin of the company, ownership status, type of industry and profitability. They found that only size had a positive and significant association with EDI.

Zeng, Hu, Yin and Tam (2012) found that state-owned firms that operated in environmentally sensitive industries had more EDI, and the firms with a better reputation were more likely to disclose environmental information. Independent variables such as firm size and loans were significant and positively associated with EDI whereas, foreign ownership and Earning per Share (EPS) were statistically insignificant. Roy and Ghosh (2011) investigated the two-way association between economic performance and quality of discretionary disclosure of sustainable environmental practices focusing on seven Asian countries, namely, India, Japan, China, South Korea, Malaysia, Indonesia and Israel. The study showed that the companies that belong to environmentally sensitive industries tend to disclose less objective information leading to lower quality disclosures and the companies belonging to countries having high relative emissions also showed a less informative and low quality of disclosure.

A Theoretical Framework

Through various survey of literature, we see that it is important to study the impact of various variables on EDI. It is important to study the disclosure index as well as the factors impacting EDI of companies listed in India.

We have used unweighted index as the use of unweighted dichotomous index reduces subjectivity involved in determining the weights of each item (Ragini, 2012; Williams, 2001).

The disclosure item is scored as one (1) if it is disclosed in the annual report or zero (0) if it is not disclosed in the annual report. We have then determined the total disclosure score in terms of number of items being disclosed. We have converted total disclosure score in terms of percentage by applying the formula (Ragini, 2012)

\frac{Total number of items appearing in the annual report}{Maximum number of items which should appear in annual reports} 100

(6)

We have mentioned the maximum number of items that are taken from annual report from Table 1 based on work done by Ragini (2012). There is a mixed result of the findings of the variable Profitability with EDI. Most studies showed that Profitability has a significant positive impact on EDI (Deegan and Gordon, 1996; Pahuja, 2009; Singh and Joshi, 2009). The justification of taking profitability as a variable is that a high profitable company will have more resource to afford environmental activities and thus would be in a position to disclose more. Profitable companies would also have the obligation to go for higher disclosure as they feel accountable to the society and assure them that high profits is not made at the cost of the environment. A low profitable company will find it difficult to spend money on environmental activities and thus would disclose less. This goes in accordance to legitimacy theory which says that companies should consider the rights of the community at large and not only the investors. This theory also says that it is easier to manage organization’s image through environmental information disclosure (Neu et al., 1998). However, studies of Choi (1999), Galani, Alexandridis and Stavropoulos (2011), Hackston and Milne (1996) and Stanny and Ely (2008) show that profitability is not a significant variable.

Table 1.

Items Disclosed by the 50 Sample Companies Taken for Index Development

Serial Number	Environmental Activities Disclosure Heads
1	Environmental Initiatives
2	Environmental Commitments
3	Environmental Management Framework
4	Environmental Disclosure
5	Environmental Expenditure
6	Products and Technologies Contributing to Environment

Source: Ragini, 2012.

Since we believe that a high profitable company can afford to go for higher environmental disclosure, we expect that profitability index will have a positive and significant association with EDI. Most of the researchers have calculated profitability as return on asset, return on sales or return on equity. We have taken return on total asset as a proxy for profitability which we have calculated as net profits before tax, divided by total assets.

Size is an important variable. Large firms have a tendency to disclose more environmental information (Deegan and Gordon, 1996; Gray et al., 2001; Jaffar et al., 2002; Pahuja, 2009). Large firms can afford to incur disclosure cost where as it is difficult for smaller firms to do so. Large-sized firms also tend to be under government pressure and public watch to disclose information about their environmental activities. This goes in accordance to legitimacy and agency theory. As per Deegan and Rankin (1996), if a company fails to comply with the expectations of the society, it is heading towards its end. Environmental disclosure lowers the agency cost as proper information about environmental disclosures reaches the principals on time. Shareholders should know that the companies are acting in their interest by abiding to environmental regulations and that they are contributing voluntarily to the environmental practices. Shareholders do not want that the reputation of the company should be at stake if fines and penalties are imposed on the organization. Companies feel that they can win the confidence of the stakeholders by transmitting the information about their environmental activities. Researchers have calculated size as log of total assets, paid up capital or log of sales. We have calculated size as log of total assets. Research shows that size is a significant variable and is positively associated with EDI (Brammer and Pavelin, 2008; Clarkson et al., 2011; Pahuja, 2009; Singh and Joshi, 2009; Suttipun and Stanton, 2012; Wu et al., 2010; Zeng et al., 2012).

Manufacturing industries pollute more than the non-manufacturing companies (Hossain et al., 2006; Suttipun and Stanton, 2012) Since the manufacturing industries are more under pressure of the regulatory authority and thus abide by more of environmental compliance, they have more to disclose. Here, we have assigned 1 for manufacturing companies and 0 otherwise. Since manufacturing companies impact the environment more than non-manufacturing companies, they should have a positive association with EDI.

Environmental Certification (CERT) is a variable which is linked with both agency theory and legitimate theory. Environmental certification reduces the disparity between the business and social value system. Certification from a legal expert agency ensures that the firm takes measures to ensure that their activities are in accordance to the criteria laid down by the certification agencies. Environmental certification reduces the agency cost as it is clear that certification is granted only to those firms whose policies and activities are environmental friendly and are in accordance to the processes and objectives laid down by the certification services. This clearly reduces the monitoring cost as the firms voluntarily follow a set of externally set and measured objectives. Mitchell and Hill (2009) and Sumiani et al. (2007) suggest that environmental certification in accordance with ISO 14001 facilitates environmental reporting.

We have taken this as a dummy variable and have assigned 1 to agencies which have an environmental certification such as ‘Eco label’ or ‘ISO 14000’ and 0 to those firms who do not have an environmental certification. Since an environmentally certified company will disclose more; we feel that there should be a positive association between environmentally certified firm and EDI.

Another factor that should have an influence on EDI is multinational characteristic of a firm. International ownership is a positive characteristic of the firm to disclose more of environmental information (Pahuja, 2009; Suttipun and Stanton, 2012). International presence forces a firm to provide information about its environmental activities to its large bracket of global stakeholders. Therefore, the environmental disclosure has to be of global standards. We have taken MNC as a dummy variable and have assigned 1 to a multinational firm and 0 if it is not.

Better-performing and highly leveraged firms tend to have lower environmental disclosures as they adhere to environmental regulations more stringently due to pressure from lenders (Wu et al., 2010). Companies have a fear that providing more information about environmental disclosure will be detrimental in raising finances from the market in the form of debt. Therefore, we feel that leverage should be negatively associated with EDI. This also goes in accordance to the study of Brammer and Pavelin (2008) and Pahuja (2009).

Research Methodology and Formulation of Regression Model

We have selected the companies from the Economic Times ET 500 top companies list brought out by the leading financial daily of India. This list is prepared on the basis of sales turnover in Indian rupees, as reported by the companies in their annual reports. It is found that annual reports are the most widely used document in the analysis of corporate social activities (Murthy, 2006). Initially, we selected the top 100 companies and omitted banking, insurance companies and financial institutions. We have not considered these companies for the reason that their business does not have a direct impact on the environment. After the first stage of omissions, our list comprised of 61 companies. Further, in the second stage, we deleted loss-making companies from the list, for the reason that companies struggling to earn profits would not be in a position to contribute to the environment. After the omission of such companies, we finally arrived at a sample of 50 companies that are profit-making and are non-banking, non-insurance and non-financial institution companies. We have listed the finally selected companies in Table 2.

Table 2.

Profile of Companies under Study

Hindalco Industries Limited	Aluminium
Ashok Leyland Limited	Auto—LCVs/HCVs
Hero MotoCorp Limited	Auto—2- and 3-wheelers
Bajaj Auto Limited	Auto—2- & 3-wheelers
Motherson Sumi Systems Limited	Auto Ancl.—Electrical
Mahindra & Mahindra Limited	Auto—Cars & Jeeps
Maruti Suzuki India Limited	Auto—Cars and Jeeps
Tata Motors Limited	Auto—LCVs/HCVs
Ultra Tech Cement Limited	Cement
ITC Limited	Cigarettes
Tata Consultancy Services Limited	Computers—Software
Wipro Limited	Computers—Software
Infosys Limited	Computers—Software
HCL Technologies Limited	Computers—Software
Jai Prakash Associates Limited	Construction and Contracting
Punj Lloyd Limited	Construction and Contracting
Reliance Industries Limited	Diversified
Larsen & Toubro Limited	Diversified
Grasim Industries Limited	Diversified
Ruchi Soya Industries Limited	Edible Oils and Solvent Extraction
Bharat Heavy Electricals Limited	Engineering—Refinery
Lanco Infra Tech Limited	Infrastructure—General
Siemens Limited	Instrumentation and Process Control
Steel Authority of India Limited	Metals—Non-Ferrous-Copper/Copper Alloy-Production
Hindustan Zinc Limited	Metals—Non-Ferrous-Copper/Copper Alloy-Production
Coal India Limited	Mining/Minerals
NMDC Limited	Mining/Minerals
Oil and Natural Gas Corporation Limited	Oil Drilling and Exploration
Gas Authority of India Limited	Oil Drilling and Exploration
Oil India Limited	Oil Drilling and Exploration
Hindustan Unilever Limited	Personal Care
Petronet LNG	Petroleum—Others
National Thermal Power Corporation Limited	Power—Generation/Distribution
Tata Power Company Limited	Power—Generation/Distribution
Reliance Infrastructure Limited	Power—Generation/Distribution
Indian Oil Corporation Limited	Refineries
Hindustan Petroleum Corporation Limited	Refineries
Bharat Petroleum Corporation Limited	Refineries
Mangalore Refinery and Petrochemicals Limited	Refineries
Pantaloons Retail (India) Limited	Retail—Apparel/Accessories
Tata Steel Limited	Steel
JSW Steel Limited	Steel
Jindal Steel and Power Limited	Steel—Sponge Iron
EID Parry (India) Limited	Sugar
Bharti Airtel Limited	Telecommunications
Idea Cellular Limited	Telecommunications
Aditya Birla Nuvo Limited	Textiles
Adani Enterprises Limited	Trading
Apollo Tyres Limited	Tyres and Tubes
MRF Limited	Tyres and Tubes

Source: Companies are taken from top companies covered in ET 500.

The period of our study is from 2009 till 2012. We have gathered the data of these companies from their annual reports of each year. Based on review of literature, we expect the signs of variables as per Table 3.

Table 3.

Expected Signs and Formula of the Variables

Variable	Expected Signs	Formula Wherever Applicable
Profitability	Positive	Net profits before tax/total assets
Size	Positive	Log of total assets
Type of Industry (manufacturing or otherwise)	Positive	Dummy variable
Certification	Positive	Dummy variable
MNC	Positive	Dummy variable
Leverage	Negative	Total debt/total assets

Source: Authors’ own based on literature review.

We have formulated the following year-wise pooled regression model to check the dependence of EDI on the company attributes (independent variable) that are discussed above.

EDI = β0 + β1 (PROFITABILITY) + β2 (SIZE) + β3 (MNC) + β4 (CERT) + β5 (MANUFACTURING) + β6 (LEVERAGE) + ε

where β0 is the intercept of the equation

β1 to β6 are the regression coefficients

ε: the error term

PROFITABILITY = Return on total assets

SIZ = Log of total assets

MNC = Dummy for multinational: 1 if multinational, 0 otherwise

CERT = Dummy for certification: 1 if it is certified, 0 otherwise

MFG = Dummy for manufacturing company: 1 if it is a manufacturing company, 0 otherwise

LEVERAGE = Debt/ Total assets

Data Analysis

From the standard deviation of all four years of EDI in Table 4, we find that EDI is consistent in all four years. This indicates that there has been no variation in the environmental disclosure pattern of the companies under study. Although the companies under study are diversified, yet we do not see changes in EDI. Standard deviation of all the independent variables for all four years indicates consistency. From Table 5, we find that for the year 2009, 2010, 2011 and 2012, R² is 0.5217, 0.52, 0.551 and 0.539 respectively which means that 52.17 per cent, 52 per cent, 55.1 per cent and 53.9 per cent variance in EDI can be explained with the help of regression. R² results show that the model’s explanatory power is high. From Table 6, for all years, SIZ and CERT are positively associated with EDI and are significant at the 1 per cent level. Our results showing size as a significant variable and its positive association with EDI goes with the results of Brammer and Pavelin (2008), Clarkson et al. (2011), Pahuja (2009), Singh and Joshi (2009), Suttipun and Stanton (2012) and Zeng et al. (2012). Our results indicate that bigger sized companies disclose more of environmental information. Certification from a legal expert agency ensures that the firm takes measures to ensure that their activities are in accordance to the criteria laid down by the certification agencies. Environmental certification reduces the agency cost as it reduces the monitoring cost since the firms voluntarily follow a set of externally set and measured objectives. Our results on the PROFITABILITY variable are concurrent with the results of Choi (1999), Galani et al. (2011), Hackston and Milne (1996) and Stanny and Ely (2008), which showed that profitability is not a significant variable.

Table 4.

Mean and Standard Deviation of the Variables under Study

YEAR	EDI		ROTA		SIZ		MNC		CERT		MFG		LEV
YEAR	Mean	SD	Mean	SD	Mean	SD	Mean	SD	Mean	SD	Mean	SD	Mean	SD
2009	0.629	0.228	13.790	11.177	4.209	0.471	0.32	0.471	0.72	0.454	0.5	0.505	0.227	0.162
2010	0.629	0.228	13.175	10.062	4.353	0.449	0.322	0.469	0.718	0.451	0.503	0.502	0.200	0.152
2011	0.629	0.228	12.729	10.638	4.397	0.443	0.32	0.469	0.72	0.451	0.5	0.503	0.199	0.151
2012	0.629	0.228	12.726	10.703	4.411	0.424	0.327	0.474	0.714	0.4564	0.510	0.505	0.202	0.149

Source: Authors’ calculations.

Table 5.

Regression Output

Year	R²	Significant Variables	Coefficients
2009	0.5217	SIZ, CERT	Positive
2010	0.520	SIZ, CERT	Positive
2011	0.551	SIZ, CERT	Positive
2012	0.539	SIZ, CERT	Positive

Source: Authors’ calculations.

As per Table 7, all signs of variables are as per expectations except for type of industry and leverage. Here in our study, leverage indicates that it has an inverse relationship with environmental disclosure index. Firms with high debt would not be interested to disclose more of information, as they would like to play safe as environmental disclosure, particularly negative would mean inviting troubles from the lenders. The study also shows that EDI in India is not dependent upon the type of industry, that is, whether it is manufacturing or otherwise. This shows that a company which is in other sectors other than manufacturing are also interested in environmental disclosure.

Table 6.

Regression Statistics from 2009 to 2012

Regression Statistics of 2009
Multiple R	0.722292
R Square	0.521705
Adjusted R Square	0.454967
Standard Error	0.168599
Observations	50
	Coefficients	P-value
Intercept	−0.46663	0.131514
ROTA	0.003166	0.304205
SIZ	0.21273	0.001561**
MNC	0.040618	0.453872
CERT	0.210642	0.000661**
MFG	−0.04849	0.366595
LEV	0.09041	0.658611
Source: Calculations are based on E views.
Note: **^{Significant at the 1% level.}
Regression Statistics of 2010
Multiple R	0.721252
R Square	0.520204
Adjusted R Square	0.453256
Standard Error	0.168864
Observations	50
	Coefficients	P-value
Intercept	−0.44915	0.165826
ROTA	0.003427	0.46687
SIZ	0.209204	0.001899**
MNC	0.036955	0.50012
CERT	0.198974	0.001803**
MFG	−0.04996	0.355151
LEV	0.040862	0.873027
Note: **^{Significant at the 1% level.}
Regression Statistics of 2011
Multiple R	0.742382
R Square	0.551131
Adjusted R Square	0.488498
Standard Error	0.163331
Observations	50
	Coefficients	P-value
Intercept	−0.63708	0.041733
ROTA	0.006119	0.046453*
SIZ	0.23142	0.000638**
MNC	0.055468	0.296556
CERT	0.186974	0.002222**
MFG	−0.04349	0.402618
LEV	0.261592	0.198264
Notes: * Significant at the 5% level,
** Significant at the 1% level.
Regression Statistics of 2012
Multiple R	0.734608317
R Square	0.53964938
Adjusted R Square	0.47541441
Standard Error	0.165406351
Observations	50
	Coefficients	P-value
Intercept	−0.688451053	0.043034
ROTA	0.00710695	0.052177
SIZ	0.232369167	0.001041**
MNC	0.06677904	0.232256
CERT	0.183898787	0.003109**
MFG	−0.042858016	0.419395
LEV	0.348169915	0.160024

Table 7.

Expected vs Actual Signs

Variable	Expected Signs	Actual Sign	Significance
Profitability	Positive	Positive	* At 5% level (in 2011)
Size	Positive	Positive	At 5% level
Type of Industry (manufacturing or otherwise)	Positive	Negative
Certification	Positive	Positive	At 5% level
MNC	Positive	Positive
Leverage	Negative	Positive

Source: Authors’ own based on literature review and regression results.

Results show that MNC is not significant indicating that multinational status does not matter for environmental disclosure. This result is concurrent with the study conducted by Hossain et al. (2006) and Suttipun and Stanton (2012). Manufacturing status, multinational status and leverage are also not statistically significant. Leverage and type of industry have an opposite sign from the predicted sign. The sign of leverage is opposite to the positive sign of Brammer and Pavelin (2008) and Clarkson et al. (2011), which was not significant. Here in our study, leverage indicates that it has an inverse relationship with EDI. Firms with high debt would not be interested to disclose more of information, as they would like to play safe as environmental disclosure, particularly negative would mean inviting troubles from the lenders.

Conclusion and Findings

We have studied the environmental disclosure practices of Indian companies and also have studied the impact of different independent variables on EDI. Through year-wise pooled regression we found that except for size and certification variable none of the independent variables of our regression model are significant. In all the years of our study, size and environmental certification are positively associated with EDI and are significant. This indicates that the higher the size of the company is, higher is the environmental disclosure. This also shows that in India, bigger companies disclose more of environmental information due to their possibility of coming under the scanner by the public, media, government and/or other stakeholders. Disclosure of more environmental information by large-sized companies may be the result of stakeholder’s pressure or may be purely voluntary in nature. The result also shows that environmental certification is positively associated with EDI. The result is quite logical as an environmentally certified company from an environmental rating agency has to follow a number of guidelines and hence has more to disclose. Environmental certification reduces the agency cost as it reduces the monitoring cost since the firms voluntarily follow a set of externally set measured objectives. Although the companies under study are diversified, yet we do not see changes in EDI. This indicates that firms from varied sectors have understood the importance of disclosing information about their environmental activities and take this disclosure of information seriously. Profitability, multinational status, leverage and the nature of firm do not matter in environmental disclosure. It indicates that it does not mean that the firms that are profitable or that have taken loans would disclose information about the environment. In order to sustain themselves in a global market over a long period of time, firms have to disclose environmental information irrespective of their multinational or domestic status, leverage or earning capacity. These variables do not have any impact on EDI.

Footnotes

Notes

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