Business strategies and management accounting in response to climate change risk exposure and regulatory uncertainty

This study aims to theorise and foster a better understanding of the strategies organisations adopt to respond to the risks and opportunities emerging from changing government climate change policies and the supporting management accounting adopted. Data include interviews and archival documents from five New Zealand electricity generators. We construct a theoretical framework that links climate change risks and opportunities to strategic responses. Climate change risk exposure increased during the period due to changes in the estimation/perception of climate change risks, market opportunities and regulatory uncertainty. Organisations' strategies changed in response, moving from a stable strategy to different combinations of anticipatory, proactive, and creative strategies, and finally regressing to a reactive strategy. Carbon management accounting changed to support the new strategy adopted in each time period. Long term physical and monetarised accounts for sustainability and extensive use of carbon information were prevalent during periods when the companies employed a proactive or creative strategy. In contrast, short-term physical accounts for unsustainability and limited use in decision-making were observed when the companies adopted stable, anticipatory or reactive strategies. Regulatory uncertainty was found to be the major constraint to a proactive strategy and carbon management accounting development in response to climate change.     

Carbon Management Accounting: Explaining Practice in Leading German Companies

This paper explores carbon management accounting (CMA) by examining the practices of leading German companies with pronounced policies and histories. Using interview data, field notes, documentary evidence, and questionnaires, this research identifies the CMA behaviour of 10 companies and grounds it in a theoretical framework to categorise the practices. With climate change to the forefront CMA provides an opportunity to (re)gain competitive advantage by exceeding the legislative requirements for reporting on carbon and carbon‐equivalent emissions, CMA, when properly understood and contextualised, provides an ability to increase both effectiveness and efficiency of information collection and dissemination, and may assist in overcoming the currently uncoordinated approaches evident in the sample companies, and thus contribute to improved carbon management performance.     

Inter-and intra-organizational stakeholder arrangements in carbon management accounting

This research investigates the role of inter-organizational arrangements and intra-organizational activities as sub-parts of carbon management accounting to reduce greenhouse gas (GHG) emissions. We apply the concept of stakeholder engagement, normally utilized in sustainability reporting, to carbon management accounting and performance. We also examine if carbon management projects that encompass many functional areas aid in GHG emissions performance. Using a sample of firms headquartered in the United States with data available from the CDP, we apply the three-stage least squares (3SLS) method to test for the endogeneity of GHG emissions reporting and performance. We find that both inter-organizational and intra-organizational arrangements improve GHG emissions performance through carbon management processes and procedures. Our research contributes to the literature by providing insight into how companies work externally with their stakeholders and internally with multiple functional areas to implement carbon management projects that reduce GHG emissions.     

Climate Change and Asset Prices: Are Corporate Carbon Disclosure and Performance Priced Appropriately?

This paper empirically assesses the relevance of information on corporate climate change disclosure and performance to asset prices, and discusses whether this information is priced appropriately. Findings indicate that corporate disclosures of quantitative greenhouse gas (GHG) emissions and, to a lesser extent, carbon performance are value relevant. We use hand‐collected information on quantitative GHG emissions for 433 European companies and build portfolios based on GHG disclosure and performance. We regress portfolios on a standard four factor model extended for industry effects over the years 2005 to 2009. Results show that investors achieved abnormal risk‐adjusted returns of up to 13.05% annually by exploiting inefficiently priced positive effects of (complete) GHG emissions disclosure and good corporate climate change performance in terms of GHG efficiency. Results imply that, firstly, information costs involved in carbon disclosure and management do not present a burden on corporate financial resources. Secondly, investors should not neglect carbon disclosure and performance when making investment decisions. Thirdly, during the period analysed, financial markets were inefficient in pricing publicly available information on carbon disclosure and performance. Mandatory and standardised information on carbon performance would consequently not only increase market efficiency but result in better allocation of capital within the real economy.     

Drivers of tight carbon control in the context of climate change regulation

Our study examines the drivers of tight budgetary control in carbon management in the context of climate change regulation. Using the setting of New Zealand Emissions Trading Scheme (ETS), our study explores how firms manage their carbon performance using carbon-focused budgetary control. Based on a survey data from New Zealand firms, including both those with and those without an ETS compliance obligations, our results suggest that economic and regulatory environmental pressures, the level of proactiveness of emissions management strategy, the level of integration of carbon issues in strategic and operational processes and the perceived importance of carbon issues are the significant drivers of tight carbon-focused budgetary control.     

The ‘Cost’ of Climate Change: How Carbon Emissions Allowances are Accounted for Amongst European Union Companies

Following the withdrawal of IFRIC 3: Emissions Rights in 2005, European Union (EU) companies participating in an Emissions Trading Scheme (ETS) do not have definitive guidelines as to how to account for carbon emissions allowances. Using a content analysis methodology, this study examines the disclosed accounting policies of companies participating in the EU ETS, and reveals how, in the absence of clear guidance, they account for their carbon emissions allowances. As the accounting method adopted will impact upon a company's financial statements, these findings are of interest to accounting standards setters, investors, financial reporting preparers, auditors, and researchers.     

Measuring What Matters: Industry Specificity Helps Companies and Investors Gain Traction on Sustainability

Financial analysts interpret the performance of companies and their securities through an industry lens. Just as an industry approach is critical in financial analysis, it's also critical in helping investors evaluate sustainability performance, since sustainability issues differ from one industry to the next—in large because of differences in how companies use natural and other social resources when bringing their goods and services to market, and how they impact society and the environment in the process. The Sustainability Accounting Standards Board (SASB) was created in 2012 to deliver a full set of sustainability accounting standards that can be used to guide industry‐specific corporate sustainability disclosure to the capital markets. SASB has now issued provisional standards for 79 industries, thereby enabling companies and investors for the first time to identify patterns of sustainability risks and opportunities both across and within industries. Although high‐level issues such as climate change, product safety, and resource intensity and scarcity have material impacts across a variety of sectors, those impacts often vary greatly from one industry to the next. Thus, although the risk may be ubiquitous, it is also differentiated to the point that each industry has its own distinct sustainability profile. Understanding these unique profiles can help companies better manage the issues that are most likely to present material risks to their industries.     

Global Pricing of Carbon-Transition Risk

The energy transition away from fossil fuels exposes companies to carbon-transition risk. Estimating the market-based premium associated with carbon-transition risk in a cross section of 14,400 firms in 77 countries, we find higher stock returns associated with higher levels and growth rates of carbon emissions in all sectors and most countries. Carbon premia related to emissions growth are greater for firms located in countries with lower economic development, larger energy sectors, and less inclusive political systems. Premia related to emission levels are higher in countries with stricter domestic climate policies. The latter have increased with investor awareness about climate change risk.     

Climate change reporting and multinational companies: Insights from institutional theory and international business

Multinational companies (MNCs) have an important impact on climate change, but knowledge on the greenhouse gas (GHG) reporting practices of MNCs is limited. A theoretical framework is developed to provide an explanation of GHG emissions reporting by MNCs. The framework combines institutional theory with the notion of MNC typology from International Business and explains how institutional pressure acting on each typology of MNC influences standardization of reporting practices and GHG emissions data quality. Propositions are developed and empirically investigated using a case study. Global MNCs are predicted to have better quality GHG emissions reporting compared to multi-domestic or transnational MNCs.     

Governance and Climate Change: A Success Story in Mobilizing Investor Support for Corporate Responses to Climate Change

Until fairly recently, the main approach to getting business to respond to climate change has been top‐down efforts to regulate emissions and enact various forms of “carbon pricing.” The aim of such efforts has been to make businesses “internalize” the costs associated with greenhouse gas (GHG) emissions. Governments are expected to set the environmental protection rules for companies in their respective countries, and markets are expected to adjust to the new regulations and carbon prices. But this classical approach to economic policy does not work when applied to a global “public goods” challenge like trying to limit the extent and effects of climate change. Instead of a top‐down approach, in which economic actors are forced to respond to regulations imposed on them, the Paris climate agreement of 2015 was reached using a bottom‐up approach centered on the concept of Intended Nationally Determined Contributions (INDCs)—along with a process that ended up encouraging the participation of all economic actors, not just governments. The authors provide an account of how the Paris agreement was reached, and why the “Portfolio Decarbonization Coalition” under the auspices of the United Nations is the most important of several private‐sector initiatives that are changing the way corporations operate. Thanks in large part to the PDC, investors can now undertake meaningful corporate governance action on climate change. With GHG emissions from a particular companies’ operations now much easier to measure, objective performance metrics on GHG emissions can now be set by boards and verified by shareholders. And current decarbonized indexes can be used as performance benchmarks for asset managers’ compensation, which can be tied to return outperformance relative to a “decarbonized” index.     

Climate transition risk and bank lending

We investigate whether and how banks in the global syndicated loan market adjusted the pricing and supply of credit to account for higher climate transition risk (CTR) in the years following the 2015 Paris Agreement. We measure CTR by considering the pollution levels of borrowers and the engagement of countries where borrowers are headquartered in addressing climate change issues. The evidence is mixed and points to nonlinear relations between lending variables and CO2 emissions. Policy events such as the Paris Agreement and government environmental awareness are significant climate risk drivers that, when combined, may amplify banks' perception of CTR.     

Carbon Accounting: Challenges for Research in Management Control and Performance Measurement

Carbon reduction programs and corporate emissions reporting have expanded rapidly across firms in response to climate change and global warming. This development is partly driven by institutional demands and partly by value creation considerations. The consequences of these developments for management accounting and control (MAC) are not clear, despite anecdotal evidence that suggests an increasing effort to incorporate carbon accounting into traditional decision and reporting processes. The reasons for this lack of clarity are the disproportionate focus in practice on carbon disclosure, compared to a small number of empirical studies, and the absence of an academic debate in this novel area from a MAC perspective. This paper seeks to stimulate such an academic debate by reviewing the extant literature, identifying key theoretical and empirical shortcomings of extant academic research, and outlining some directions for future studies on carbon accounting. These directions are inspired by more established MAC research that may help to guide and organize MAC research in the emerging and exciting field of carbon accounting.     

Energy efficiency complexities: A technical and managerial investigation

Increased concern about sustainability issues has been voiced in the accounting literature. Although environmental performance is only one dimension of sustainability, it is nevertheless a key factor, especially in sectors such as the process industry, which consume substantial volumes of materials and energy. Energy itself is important because its production is a major cause of carbon emissions. Hence efforts to reduce its use are important, and here energy efficiency measurement and management play a key role.Although the conceptual challenges posed by energy efficiency measurement are well known in the technical literature, there has been little discussion of energy efficiency management. This paper examines the complexities involved in the measurement and management of energy efficiency. In particular, it examines how these complexities impede effective use of management control systems to impact the ability and motivation of employees to work toward the goals of sustainable development. The study is a cross-disciplinary one, and combines technical energy efficiency research and environmental management accounting research in performance management. The study provides practical knowledge of what happens in organizations pursuing sustainable development, in this case environmental performance. The paper demonstrates a performance indicator that does not allow proper energy efficiency performance management because it is still technically underdeveloped. Setting targets for the indicator is especially problematic.     

Competitive advantage on a warming planet

Whether you're in a traditional smokestack industry or a "clean" business like investment banking, your company will increasingly feel the effects of climate change. Even people skeptical about global warming's dangers are recognizing that, simply because so many others are concerned, the phenomenon has wide-ranging implications. Investors already are discounting share prices of companies poorly positioned to compete in a warming world. Many businesses face higher raw material and energy costs as more and more governments enact policies placing a cost on emissions. Consumers are taking into account a company's environmental record when making purchasing decisions. There's also a burgeoning market in greenhouse gas emission allowances (the carbon market), with annual trading in these assets valued at tens of billions of dollars. Companies that manage and mitigate their exposure to the risks associated with climate change while seeking new opportunities for profit will generate a competitive advantage over rivals in a carbon-constrained future. This article offers a systematic approach to mapping and responding to climate change risks. According to Jonathan Lash and Fred Wellington of the World Resources Institute, an environmental think tank, the risks can be divided into six categories: regulatory (policies such as new emissions standards), products and technology (the development and marketing of climate-friendly products and services), litigation (lawsuits alleging environmental harm), reputational (how a company's environmental policies affect its brand), supply chain (potentially higher raw material and energy costs), and physical (such as an increase in the incidence of hurricanes). The authors propose a four-step process for responding to climate change risk: Quantify your company's carbon footprint; identify the risks and opportunities you face; adapt your business in response; and do it better than your competitors.     

Strategic Responses to Changing Climate Change Policies: The Role Played by Carbon Accounting

Using a broad institutional theory lens, this paper examines the climate change strategies and carbon accounting practices adopted by two New Zealand electricity firms in response to changes in government climate change policies over time (2002–12). The two firms pursue different strategic responses to climate change‐related institutional and economic pressures in order to maintain both legitimacy and a competitive advantage. Five different strategic responses are identified: avoidance, operational conformance, strategic conformance, strategic differentiation, negotiation and manipulation. Firm‐level characteristics are also important drivers of inter‐firm variations in the strategic responses. Further, carbon accounting makes the greatest contribution to carbon reduction when integrated as part of strategic processes that support strategic conformance and strategic differentiation. Carbon monitoring systems, internal carbon information use and carbon disclosure were the main forms of carbon accounting used to realise the different strategies employed.     

Risk perception and worry in environmental decision-making – a case study within the Swedish steel industry

Sustainable development is an important issue for the industry in order to fulfil legislation requirements and to be able to use green marketing as a competitive advantage. The Swedish steel industry has implemented a large number of environmental improvements, for example, within energy efficiency, raw materials and recyclability. Technical improvements can help the industry decrease its environmental impact; however, in order to reach sustainable development, more factors need to be considered: an effective environmental decision-making process, for example. This process may be influenced by personal factors such as risk perception and worry, which are factors that will not contribute to an effective decision-making process. The aim of this study was to investigate if personal worry and risk perception influenced environmental decision-making within the Swedish steel industry. Thirty-eight interviews were performed at 10 Swedish steelworks using the Q-methodology. The major perceived environmental risks with the facility and personal worry were assessed, compared to the day-to-day work. It was concluded that the major perceived risks were emissions of carbon dioxide, use of non-renewable energy and emissions of particulate matter. The decision-makers were mainly worried about emissions of carbon dioxide, emissions of dioxin and use of non-renewable energy. The environmental issues that were prioritised in practice (day-to-day work) were emissions of carbon dioxide, emissions of particulate matter and emissions of metals. Even though emissions of carbon dioxide were given the highest priority in the Q-sorts, there was in general no clear relationship between risk perception and personal worry with the prioritised environmental issues at the steelworks. The quantitative analysis of the Q-sorts and the qualitative interviews both showed that the day-to-day work was unaffected by personal worry and risk.     

Climate transition risk in sovereign bond markets

Is climate transition risk factored into sovereign bond markets? We find that carbon dioxide emissions, natural resources rents, and renewable energy consumption—as measures of transition risk—significantly affect yields and spreads. Countries with lower carbon emissions incur lower borrowing costs. Advanced countries with reduced earnings from natural resources rents and increased renewable energy consumption are associated with lower borrowing costs, which differ from the effects in developing countries. Given the threat that climate change poses to the global economy and the fast materialization of transition risk, we advocate an increase in the significance of climate transition risk factors as determinants in sovereign bond markets.     

Revisiting carbon disclosure and performance: Legitimacy and management views

With corporate disclosure of carbon emissions rapidly increasing, the long-standing question remains whether carbon disclosure has any influence on the improvement of carbon performance. Previous studies of environmental disclosure and performance have predominantly focused on whether disclosure is a substitute for poor performance. Little attention has been devoted to the more important question about how changes in disclosure may lead to subsequent changes in performance over time. Following the rationales taken by the legitimacy and management perspectives, we revisit the relationship between carbon disclosure and performance, with a focus on changes that disclosure may (or may not) create. Using a change analysis of Global 500 companies and their carbon emission and disclosure data released between 2008 and 2012, this study finds that the change in carbon disclosure levels is positively associated with a subsequent change in carbon performance (examined through direct and indirect carbon emission intensities). Thus, regardless of whether disclosure has been used as a legitimising tool for prior poor performance, this study confirms that carbon disclosure motivates companies and creates an ‘outside-in’ driven effect for subsequent change and improvement in carbon performance. However, the association between changes in carbon disclosure and performance is relatively weaker in high energy-intensive firms.     

Can enhancing financial inclusivity lower climate risks by inhibiting carbon emissions? Contextual evidence from emerging economies

Climate change is regarded as a global concern whereby lowering climate risks, especially by curbing greenhouse gas emissions, has become a critically important policy agenda worldwide. Hence, this study assesses whether financial inclusion, alongside energy efficiency improvement, renewable energy use, economic growth, international trade, and urbanization, can mitigate carbon dioxide emissions in 22 emerging economies. Considering the period of analysis from 2008 to 2018 and utilizing econometric methods robust to handling cross-sectionally-dependent, heterogeneous, and endogenous panel data, the findings reveal that financial inclusion is directly associated with higher discharges of carbon dioxide. Contrarily, energy efficiency improvement and higher share of renewable energy in the aggregate energy consumption level inhibit carbon dioxide emissions. Moreover, energy efficiency gains moderate the financial inclusion-emissions nexus by jointly reducing carbon emissions with greater financial inclusivity. Finally, the results indicate that economic growth, international trade, and urbanization trigger climate risks by boosting the emission figures. In light of these findings, several carbon dioxide-mitigating policies are recommended for neutralizing climate risks in emerging countries of concern.     

The Need for Sector‐Specific Materiality and Sustainability Reporting Standards

The market continues to show growing interest in how well companies are performing across a broad range of environmental, social, and governance (ESG) dimensions. Partly as a result, the companies themselves are paying more attention to these performance dimensions, how they contribute to financial performance, and how to evaluate tradeoffs that arise. One of the greatest challenges facing both investors and companies in using ESG performance information is the absence of standards. Another challenge is knowing which of the many ESG dimensions are most material for a company in terms of creating value for shareholders and stakeholders over the long term. The authors argue that materiality and reporting standards must be developed on a sector‐by‐sector basis, and that failure to do so will result in inconsistent and even misleading disclosures. The authors illustrate this with the case of climate change. The SEC has already issued interpretive guidance on climate change disclosures, making it quite clear that existing regulations require companies to report on material effects of climate change, from both an upside and downside perspective. Based on an analysis of 10K filings in six industries, the authors show that, even within a given industry, there is substantial variation in reporting among companies that ranges from no disclosure, to boilerplate disclosure, industry‐specific interpretation, and the use of quantitative metrics. After providing further detail on this by looking at the airline and utilities industries, the authors conclude by offering a methodology for defining material ESG issues on a sector‐by‐sector basis that could provide the basis for developing key performance indicators.