Carbon emission and its impact

In the present world the increasing technological, commercial and social developments and growing population has raised a question of environment protection and safety in front of the corporate bodies. This relates to whether the companies actually pay allowance for the harm they are causing to the environment and whether they actually pay to go green. The studies have shown that the commercial and corporate bodies are highly responsible for the carbon emission in the environment which is resulting in causing a great harm to the atmosphere. This also results in climatic changes all over the world. The most harmful effect of carbon emission is the ozone layer depletion which has given rise to the failure in protecting the harmful ultra violet rays to reach the natural habitat.  With the engagement of the companies with the environment through Corporate Social Responsibility mechanism, the disclosure of carbon emission has become essential for every company. This research proposal aims at developing a hypothesis for carbon emission performance disclosed by the companies voluntarily or mandatorily. This proposal includes the practical and theoretical motivation for the justification of the issue considered for research with extensive literature review to develop the hypothesis in relation to carbon emission or voluntary disclosure. 

The increased level of carbon emission in the environment has become a serious environmental issue at international level since it is the root cause of the huge climatic change and deterioration of atmosphere. According to Yang, et.al (2016), the corporate bodies are the major source of carbon emission and therefore they can contribute manifold in reducing the level of emission. With the introduction of the concept of Corporate Social Responsibility (CSR) in the regulatory framework of many countries, the corporate bodies are becoming aware and willing to disclose the carbon emission since this somehow relates to their financial performance. Apart from this the harmful effect of carbon emission on the environment also affects the operations of businesses due to many reasons such as climatic changes affecting the availability and supply of raw material, adverse effect on the quality of raw material, decline in the value of shareholders’ investment, reduced share prices etc. In this way there is a direct connection between the carbon emission performance disclosure and financial performance and growth of a company (Yang, et.al, 2016). The voluntary disclosure by companies show their efficiency for the management of emissions and this results in the generation of interest of shareholders with regards to investing in the business of the company based on its potential (Ben-Amar & Mcllkenny, 2015). Therefore carbon emission disclosure is an important issue for all corporate bodies globally. 

Carbon emission performance disclosure and financial performance

This research aims at justifying the significance of carbon emission disclosure for the companies with regards to accelerating the financial performance by using the agency theory. The previous research by Yang, et.al (2016) clearly states that the carbon emission disclosure has direct influence on the financial performance of corporate bodies. Since the climatic change is an important concern for international business, therefore this is an important issue for the research. The research will address the gaps in the previous research and will be able to reconcile the conflicts to resolve the problem in an efficient manner. The carbon emission disclosure by the company should be voluntary and accurate based on actual facts and figures so as to enable the shareholders determine actual financial performance and worth of the company. This also aims at enabling the companies to prove their environment efficiency. Thus this research will also study the impact of carbon emission disclosure on non-financial performance of companies along with financial performance (Burritt, et. Al, 2011). 

According to Timo & Volker, 2011, the disclosure of carbon emission creates a huge financial burden on the companies since meeting the emission targets may result in decreased profits to a large extent. This involves the costs of monitoring, and achieving the emission targets by the agencies and the residual loss arising out of the processes. This requires linking the incentives of the agents directly to the performance for achieving the targets efficiently (Ioannou, et. al, 2014). Agency theory clearly implies that the slack in the targets of agents are created by the asymmetry in their incentives. In order to achieve the required objectives through agents, it is important to motivate them financially. As per Ionnaou, et.al, (2014) apart from this the reason of slack should be found so that the targets could be achieved even if the obstacles are created by the unexpected circumstances and variable factors. In the opinion of Buritt, et.al, 2011, there are many ways which result in reducing the carbon emission such as use of low energy emission equipment, implementing carbon emission management system within the business operations and procedures, developing low carbon technology, sharing carbon equipment for multitasking, setting emission targets for managers etc. (Doda, et.al, 2016). By using the carbon emission reduction techniques, if the companies will be able to achieve their targets then the surplus could be sold in the carbon trading market in order to earn profits., In this way the carbon disclosure will not generate financial burden on the business of the company (de Villiers & van Staden, 2011).

Carbon emission disclosure and non-financial performance

As per the prediction of the agency theory (Freeman, 2010), the carbon emission performance of a company also create non-financial impact on the business and operations of the company. These are the intangible impacts which indirectly result in the financial influence. The disclosure of carbon emission results in building a good reputation of the company in the trading market which attracts shareholders to invest in the company deriving financial benefits for the company. Similarly, from regulatory perspective this is the compliance ofo CSR policy resulting in development of a better relationship of company with the government and legal bodies. This strong relationship also adds to the reputation and goodwill. Apart from this the relationship with the suppliers and customers also gets stronger since customers all over the world are environment conscious and contribute to the efforts which move towards environment protection (Hahn, et.al, 2015).

In the opinion of Li, et.al (2016), Agency theory is a mechanism which supposes the relationship between principles and agents with regards to a specific problem. The principal cause of a problem and the agents spreading the problem can be identified using the agency theory. The problems arise in relationships due to differences in goals and unaligned objectives and therefore this theory assists in resolving such problems by strengthening agency relationships. The agency theory can be used as the theoretical model to test the relationship between the financial and non-financial performance of company and carbon emission disclosure (Hannafey & Vitulano, 2013). The carbon emission disclosure is the principal factor whereas the various financial and intangible factors affecting the overall performance of the company act as agents under this theory in order to test the relationship and link connecting the two variables (Li, et.al, 2016).

The research conducted by Clarkson, et.al, (2011) on 242 companies belonging to the most polluting industry of US shows that the companies with high environmental performance increase tend to achieve growth in sales and profitability (CDP, 2012). This empirical evidence clearly demonstrates the financial impact of carbon emission performance on the company. However the empirical evidences for the non-financial impact cannot be found.

The disclosure of carbon emission performance by companies results in both financial and non-financial impact on the sustainability, growth and profitability of a company from both the investment and regulatory perspective. 

References

Ben?Amar, W. and McIlkenny, P., 2015, “Board effectiveness and the voluntary disclosure of climate change information”,Business Strategy and the Environment, 24(8), pp.704-719.

Berthelot, Sylvie, & Robert, 2012, “Climate change disclosures: An examination of Canadian oil and gas firms.”, Issues in Social and Environmental Accounting, 5(1/2), pp.106-123.

Burritt Roger L, Schaltegger, Stefan, & Zvezdov, Dimitar, 2011, “Carbon management accounting: explaining practice in leading German companies.”, Australian Accounting Review, 21(1), pp.80-98.

CDP, 2012, CDP 2012 Scoring Methodology, Retrieved from https://www.cdproject.net/Documents/Guidance/CDP-2012-Scoring-Methodology.pdf

Clarkson, Peter M, Li, Yue, Pinnuck, Matthew, & Richardson, 2014, “The valuation relevance of greenhouse gas emissions under the European Union carbon emissions trading scheme.”, European Accounting Review, pp.1-30.

Clarkson, Peter M, Li, Yue, Richardson, Gordon D, & Vasvari, Florin P, 2011, “Does it really pay to be green? Determinants and consequences of proactive environmental strategies.”, Journal of Accounting and Public Policy, 30(2), pp.122-144.

De Villiers, Charl, & van Staden, Chris J., 2011,”Where firms choose to disclose voluntary environmental information”, Journal of Accounting and Public Policy, 30(6), pp.504-525.

Doda, B., Gennaioli, C., Gouldson, A., Grover, D. and Sullivan, R., 2016, “Are corporate carbon management practices reducing corporate carbon emissions?”, Corporate Social Responsibility and Environmental Management,23(5), pp.257-270.

Freeman, R.E., 2010, “Strategic management: A stakeholder approach”, Cambridge University Press

Hahn, R., Reimsbach, D. and Schiemann, F., 2015, “Organizations, climate change, and transparency: Reviewing the literature on carbon disclosure”, Organization & Environment, 28(1), pp.80-102.

Hannafey, F.T. and Vitulano, L.A., 2013, “Ethics and executive coaching: An agency theory approach.”, Journal of business ethics, 115(3), pp.599-603.

Ioannou, I., Li, S.X. and Serafeim, G., 2014, “The Effect of Target Difficulty on Target Completion: The Case of Reducing Carbon Emissions.”

Li, F., Li, F., Li, T., Li, T., Minor, D. and Minor, D., 2016, “ CEO power, corporate social responsibility, and firm value: a test of agency theory.”, International Journal of Managerial Finance, 12(5), pp.611-628.

Timo B., & Volker H., 2011, “How hot is your bottom line? Linking carbon and financial performance”, Business & Society, 50(2), pp.233-265.