Corporate environmental sustainability disclosures and environmental risk

Abstract

Purpose– This paper aims to propose and apply a novel risk-based approach to explore whether socio-political theories explain the level of corporate environmental disclosures given inconclusive evidence on the relation between environmental disclosure and environmental performance.Design/methodology/approach– Based on content analysis of corporate risk reporting, the paper develops measures of environmental risk to proxy for a firm’s exposure to public pressure in regard to environmental concerns that should be positively associated with the level of corporate environmental disclosures according to socio-political theories. Multiple regressions are used to test the predictions of socio-political theories for US Standards and Poor’s 500 constituents from polluting sectors.Findings– The level of environmental disclosures is found to be positively associated with a firm’s environmental risk while unrelated to its environmental performance. The findings suggest that firms tend to provide higher levels of environmental disclosures in response to greater exposure to public pressure as depicted by broad environmental indicators. The results are robust to alternative measures of environmental disclosures, environmental risk and environmental performance, alternative specifications of the economic model and additional sensitivity checks.Research limitations/implications– This study is limited to US firms in polluting sectors. The risk-based approach proposed may not be appropriate to cover sectors where corporate risk reporting is less likely to address environmental risk, but it could potentially be adopted in other countries with advanced risk reporting regulation or practice.Practical implications– Findings are important to understand a firm’s incentives to disclose environmental information. Cross-sectional differences found in environmental disclosures, risk and performance, highlight the importance of considering industry affiliation when analyzing environmental data.Originality/value– This paper is the first to use firm-level environmental risk variables to explain the level of corporate environmental disclosures. The risk-based approach taken suggests opportunities for research at the multi-country level and in countries where corporate environmental performance data are not publicly available.