an assessment of the quality of environmental information disclosure of corporation in china

Systems Engineering Procedia 5 ( 2012 ) 420 – 426

2211-3819 © 2012 Published by Elsevier Ltd. Selection and peer-review under responsibility of Desheng Dash Wu.doi: 10.1016/j.sepro.2012.04.064

An Assessment of the Quality of Environmental Information Disclosure of Corporation in China

Pan Ane* Wuhan University of Technology, Wuhan, Hubei, China, 430070

Abstract

Environmental management engineering is increasingly becoming concerned. As a result, many firms in China are voluntarily increasing the extent of their environmental disclosure in their annual report. Corporate environmental disclosure does have potential economic significance considering the scarcity of alternative information sources. The study focuses on listed firms in heavily pollution industries in China, where environmental concerns are especially acute. Results show that the disclosure content is limited and incomplete, the disclosure pattern is single, and the utility is low. © 2010 Published by Elsevier Ltd.

Keywords: Environmental disclosure; disclosure quality; Engineering assessment system

1. Introduction

With the development of economy, the deterioration of environment has been obvious to all. Corporate disclosure of environmental information completely and specification is an important way to meet the information needs of stakeholders. Surveys conducted by Denis Cormier et al. (2005) [1] and Bakhtiar Alrazi et al. (2009) [2]suggest that firms have increased the level of environmental disclosure over the past decade. However, since corporate environmental disclosure is only partially regulated, it tends to vary widely across firms. The domestic academic began to introduce and study the environmental information disclosure issues since the last century 90's and a large number of relevant research results have been obtained. However, the results exists two defects. Firstly, the majority emphasizes on qualitative and policy analysis and the small number of empirical researches focuses on a particular industry or corporation, lack universality [3]. Secondly, there is no integration of environmental information disclosure assessment [4]. Thus, in this paper, based on the quality features of the environmental information disclosure, the environmental information disclosure assessment system is designed, the environmental information disclosure situation in China is discussed, and some relevant results are provided to improve the level of the corporation on environmental information disclosure.

2. Quality characteristics of the environmental information disclosure

* Corresponding author. Tel.:15342219669 E-mail address: [email protected]

Available online at www.sciencedirect.com

© 2012 Published by Elsevier Ltd. Selection and peer-review under responsibility of Desheng Dash Wu.

421 Pan Ane / Systems Engineering Procedia 5 ( 2012 ) 420 – 426

Reference to the Financial Accounting Standards Board's Concepts Statement No. 2, Qualitative Characteristics of Accounting Information (CON2) in 1980, and the quality of environmental reporting is determined in relation to the usefulness of the environmental information to the users. For environmental information to be useful to stakeholders firstly it must be relevant and full which ensures users are provided with as much information as possible. Environmental information is deemed relevant if it assists stakeholders in understanding (1) environmental management policies and plans, (2) environmental impacts, (3) costs and expenses of environmental protection, and (4) benefits from environmental protection. The characteristic of relevance focuses on the usefulness of information in telling stakeholders about the corporation’s actions and decisions and aiding them to predict the corporation’s future prospects.

Secondly, the quality environmental reporting is reliable or verifiable environmental information that is not designed to obfuscate or mislead users. This characteristic focuses on accuracy, use of estimates, ability to quantify and measure, and the level of support or evidence. A shorthand way of thinking about whether information is of verifiability is to ask whether a sufficiently knowledgeable third party would look at the underlying data and derive a similar result.

Thirdly, the quality of environmental reporting should be comparability. This characteristic focuses on accounting for similar events in the same way, as well as accounting differently for dissimilar events. A shorthand way of thinking about comparability is to ask whether the information is prepared in a way that lends itself to informed comparisons with other companies.

Finally, clarity is also an important quality of environmental reporting. This characteristic focuses on the understandability, organization, and comprehension of the information. A shorthand way of thinking about clarity is to ask whether the corporation's environmental information is presented in an organized, clear, and concise fashion, appropriately balancing brevity with sufficiency [5].

3. Framework for assessment quality of environmental information disclosure

It is both essential and possible to develop a common framework for assessing quality of environmental reporting. A common framework would promote benchmarking among corporations and encourage improvements in reporting by setting a high standard. Our framework is designed as table 1.

Table 1. An assessment system of the corporation environmental information disclosure quality Target Sub targets Elements Indicators

Comprehensive environmental information disclosure quality index

Relevance

Environmental management policies and plans

Enforcement of external environmental laws and regulations Environmental management strategies and internal control system Environmental management objectives and plans

Environmental impacts

Effects of products and production on environment Possible environmental liabilities or lawsuits

Costs and expenses of environmental protection

Expenses of environment governing Costs of pollution discharges and treatments Other expenses relation to environmental protection

Benefits from environmental protection Benefits from the pollution control Awards for environmental protection

Reliance

Environmental information quality management

Environmental information auditing Explanation to guarantee the quality of environmental information

Comparability Environmental information processed by the unified norms

Environmental information indexes matched with the general standard

Clarity

Understandability, organization, and comprehension of the information

Information is presented in an organized, clear, and comprehensive form


For each item in the sheet, a numerical rating was assigned depending on the existence and specificity of that disclosure. A score of 0 is assigned if there was no disclosure of that item; 1 is assigned for mention in general terms; a score of 2 is assigned if disclosure is company specific and described quantitatively. A summation of quality scores across the different categories results in an overall disclosure quality measure. Finally, the comprehensive index of environmental information disclosure quality is denoted by EDI, and the comprehensive index of environmental information disclosure of Company i can be denoted by the formation:

nN

EDIEDI

n

jijij

i1

Where ijEDI is the score of item j of Company i, the number of disclosure items is n, the best score of each item is

N, the probability of item j in Company i is ij . Environmental information disclosure is predominantly of a self-laudatory nature. The significance level of every voluntary item is equal to each user. Furthermore, the quality elements of reporting are distinct yet interdependent. Therefore assumed ij is 1, because n is 14 and N is 2, the

formulate ( ) can be simplified as the following:

28

14

1jij

i

EDIEDI

4. Application

4.1. Sample and method

Industries involved with environmentally sensitive operations possess collective reputations under much greater scrutiny and criticism than other firms [6]. Firms with superior environmental performance in industries with negative reputations have incentives to inform stakeholders of their strategy by voluntarily disclosing more environmental information [7]. Reference to the industry classification standard set forward by China Security Supervision Committee, 110 firms, excluding special treated company, adhere to the rule of generalization, are selected from electricity, steel, cement oil chemicals, Pharmaceutics, mining, paper merchants, timber products, and other heavily polluted industries.

In China, annual reporting is the most dominant and popular form to disclose environmental information. Samples are collected from Shanghai Securities Exchange, Shenzhen Securities Exchange, and Juchao information web. Annual reports issued by sample firms from 2007 to 2009 are read, and based on the above framework for assessing quality of environmental reporting all environmental disclosure items are duly noted and rated according to the level of detail provided by the firm. To ensure consistency over time and across firms, two persons independently review all individual scores. All disagreements are subsequently reviewed by one of the co-researchers.

4.2. Results

4.2.1 Disclosure percentage The percentage of environmental disclosure is different in variable industries. From table 2, in 2009, the superior

environmental performance is the industry of mining, oil chemicals, steal, paper merchants, and pharmaceutics The disclosure percentage is increasing from 66.36% in 2007 to 83.63% in 2009, thus suggesting a more systematic concern for environmental management. During three years, there are 47 firms disclosed environmental information consistently, the percentage is 42.73; 18 firms no disclosed, and the percentage is 16.37%, expressed by table 3.


Table 2 Disclosure percentage of sample firms in different industries Industry Total firms Sample firms Number of firms disclosed Disclosure percentage in the industry

2007 2008 2009 2007 2008 2009

Electricity 62 12 9 10 10 75% 83.33% 83.33%

Steel 37 8 5 6 7 62.50% 75% 87.5%

Cement 20 4 2 3 3 50% 75% 75%

Oil chemicals 124 24 15 19 22 62.50% 75% 91.67%

Mining 15 2 1 2 2 50% 100% 100%

Timber products 60 13 8 9 10 61.54% 69.23% 76.92%

Coal metallurgy 76 15 10 11 12 66.67% 73.33% 80%

Pharmaceutics 125 25 18 19 20 72% 76% 84%

Paper merchants 34 7 5 6 6 57.14% 85.71% 85.71%

Total 533 110 73 85 92 66.36% 77.27% 83.63%

Table 3 Number of disclosing firms from 2007 to 2009

Number of firms Percentage

Disclosure for three years continually 47 42.73%

Disclosure for two years continually 37 33.64%

Disclosure for two year interruptedly 1 0.92%

Disclosure for one year only 7 6.36%

No disclosure 18 16.37%

Total 110 100%

4.2.2 Disclosure location

In 2007, the percentage to disclose environmental information in form of Director’s statement and Notes of the financial reporting is 60.91 while it is up to 74.54 in 2009. There are six firms which organize their environmental disclosures neatly in one separate section of the report, and the percentage is 5.45.

Table 4 Disclosure location

2007 2008 2009

Number of disclosing

firms Percentage


firms Percentage


firms Percentage

Director’s statement 54 49.09% 56 50.91% 60 54.55%

Notes of the reporting 17 15.26% 25 22.72% 27 24.54%

Important items 2 1.82% 1 0.91% 1 0.91%

Separate section 6 5.45% 3 2.73% 4 3.64%


4.2.3. Disclosure content

The largest components of environmental disclosure, in most sectors and overall, are environmental management, pollution abatement, and sustainable development. Without a unified pattern to disclose environmental information up to date in China, the majority disclose environmental information only in qualitative terms, scarcity in quantitative. The percentage of the former is 78, the later only 22 presented as figure 1. Figure 2 presents the number of words to disclose environmental information. Forty percentages of companies disclose environmental information in less than 100 words. For examples, annual reporting of China Haicheng (Code 002216) in 2009 just mentioned that future market would get more concerned about energy saved, environmental protection, and nature friendly; annual reporting of Jindong Cement (Code 000401) in 2009 just mentioned that Luan County sub company and Sanyou sub company had obtained the capital of 375 million Yuan for environmental protection, and obviously these descriptions are very faint in hundreds of pages of annual report.

Figure 1 Quantitative and no quantitative disclosure Figure 2 Number of disclosure words

Based on above framework of assessment system, the final results are presented as table 5. The highest score is

0.4474 in 2007 and 0.63 in 2009. Obviously, the overall quality of environmental information in China is low and it is not satisfied with users. In the course of reporting analysis, there is some companies’ environmental disclosure missing each year.

Table 5 Disclosure quality index Items 2007 2008 2009

Maximum of EDI 44.74% 53.45% 63%

Minimum of EDI 0 0 0

Mean of EDI 18.56% 24.10% 27.43%

Table 6 Disclosure content Sub target

Element Indicator Number of disclosing firms

Total score Percentage of the best score

Relevan

ce

Environmental management policies and plans

Enforcement of external environmental laws and regulations

80 123 18.64%

Environmental management strategies and internal control

system 66 92 13.94%

Environmental management objectives and plans 58 85 12.88%

Environmental impacts

Effects of products and production on environment 182 350 53.03%

Possible environmental liabilities or lawsuits 60 84 12.73%

Costs and expenses of

Expenses of environment governing 149 298 45.15%


environmental protection

Costs of pollution discharges and treatments 186 372 56.36%

Other expenses relation to environmental protection 57 102 15.45%

Benefits from environmental protection

Benefits from the pollution control 43 86 13.03%

Awards for environmental protection 46 92 13.94%

Reliance

Environmental information quality management

Environmental auditing 49 98 14.84% Explanation to guarantee the

quality of environmental information

42 84 12.72%

Comparability

Environmental information processed by unified norms

Environmental information indexes matched with the general standard

56

112

16.96%

Note The number of sample is 330 and the best score is 660. From table 6, environmental reporting focuses on the relevance including Costs of pollution discharges and

treatments, Effects of products and production on environment, Expenses of environment governing, Enforcement of external environmental laws and regulations, and etc..Other characteristics of quality including the reliance and comparability are still poor.

4.3. Summary

Firstly, more and more companies would disclose environmental information recent years. The percentage increase from 66.36 in 2007 77.27% in 2008 to 83.63% in 2009, however, it is only 42.37% for disclosure for three years continually.

Secondly, the environmental information disclosed is historic or past in essence, and that impacted on future development is disclosed scarcely. Most of the items disclosed belong to the response to past environmental affairs, such as costs of pollution discharges and treatments, expenses of environment governing, products and production recycling, and etc. The information disclosed is lack of predictive value.

Thirdly, the environmental information disclosed is limited and incomplete. As presented by figure 2, 40% companies disclose environmental reporting in less than 100 words, which is coarse and rough. Only 5% disclose in quantitative terms, and 17% in both quantitative and qualitative terms. Most firms are at low disclosure level with weak environmental awareness.

Fourthly, the environmental disclosure pattern is simple, and the scientific, systematic disclosure has not been popularized. The environmental disclosure is voluntary in nature in China. The majority of companies have less internal incentive to inform the he environmental performance to stakeholders. Among the selected sample of heavily pollution industry, the highest percentage of companies disclosed in board report or notes of annual reporting is just 74.54 in 2009.

At last, the environmental information disclosed is of low utility. The environmental reporting disclosed by company prefer qualitative to quantitative, positive to negative. The quantitative information focus on environmental subsides, and costs and expenses of environmental protection. Few companies clarify the specific environmental management implement in details, and the same as potential environmental liabilities and legitimates. Environmental information auditing and Explanation to guarantee the quality of environmental information are ignored by the majority of companies, which lead to the poor reliance of environmental information disclosure quality. Current voluntary disclosure may not be a reliable source for evaluating performance.

5. Conclusion


Environmental information disclosure is the essential to enforce environmental management engineering. The purpose of this study is to identify the characteristics of environmental disclosure quality, construct the assessment system, and analyze the environmental disclosure practices of firms in environmentally sensitive industries in China. The results provide obvious evidence that China firms disclose environmental information not as a result of internal incentives because the overall environmental information disclosure quality is typically low while the number of disclosing firms increasing. The objective for further research should be to explore the components affected environmental disclosure quality. Another dimension that requires further investigation is the importance of temporal trends and industry membership in environmental disclosure.

References

1. Denis Cormier, Michel Magnan and Barbara Van Velthoven. Environmental disclosure quality in large German companies: economic incentives, public pressures or institutional conditions? European Accounting Review. No.1(2005)3-39 2. Bakhtiar Alrazi, Maliah Sulaiman, Nik Nazli Nik Ahmad, Alongitudinal examination of environmental reporting practices in Malaysia. Gadjah Mada International Journal of Business.No.1(2009)37-72 3.Lizhen, Research on the strategy of enterprise environmental report development in China.Economy Problems. No. 2 (2008) 52-54. 4. Zhong Chaohong, Gan Shengdao and Qiu Ying, Assessment and Analysis of Steel Enterprise Environmental Reports. China Population, Resources and Environment. 3(2007)118-121 5. Gregory J. Jonas and Jeannot Blanchet, Assessing quality of Financial Reporting, Accounting Horizons, 3(2000)353-363 6. Barth, M. B., Mc. Nichols, M. F. and Wilson, G. P. Factors influencing firms’ disclosures about environmental liabilities, Review of Accounting Studies, No. 2 (1997) 35–64. 7. Cormier, D. and Gordon, I. M.. An examination of social and environmental reporting strategies, Accounting, Auditing and Accountability Journal, No.5 (2001)587–616.

an assessment of the quality of environmental information disclosure of corporation in china

Documents