UNIVERSITY OF GRONINGEN Master thesis Does assurance provider choice influence the relationship between disclosure of carbon dioxide emission information and investor value?

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UNIVERSITY OF GRONINGEN

Master thesis

Does assurance provider choice influence the relationship between disclosure of carbon dioxide emission information and investor value?

T.J. Zwanenburg 6/23/2013

Master Accountancy & Controlling

Thomas Zwanenburg Supervisor: Dr. J.S. Gusc

1732692 2nd Supervisor: Dr. W.J. van Elsacker

Admiraal de Ruyterlaan 17 Groningen

+31643266233

thomaszwanenburg@hotmail.com

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Introduction

This study investigates whether the choice of assurance provider for carbon dioxide (CO2) information has influence on the relationship between the degree of CO2 information disclosure and investor value. It finds out whether organizations which disclose more information concerning their CO2 emission enjoy a higher investor value than organizations that do not and whether assurance from an accounting organization strengthens this relationship. The assurance can be performed by either an accounting organization or a non-accounting organization.

For an organization to have business for the long term, it is important to have the ability to recover costs and attain the desired return on investment. The choice of making an investment in assets measuring, controlling and therefore reducing the emission of CO2 is an example of safeguarding long term viability. The assessment of the quality of management decisions and the appropriateness of the business strategy on CO2 emission is difficult. Disclosing information on the strategy and decisions management will help investors value the long term benefits concerning climate costs. These costs are in most organizations not directly accounted for, but may be in the future. What gets measured gets managed: organizations which have invested in measuring and thus are managing their CO2 emission are prepared for future regulations. In the eyes of investors they will be more worth than organizations that have not. The assurance on the information concerning CO2 will give an investor confidence in the reliability of that information, regardless the degree of assurance and whether it concerns CO2 statements specific or it is a component of assurance on corporate responsibility reporting.

Reporting and assurance on greenhouse gas (GHG) emissions has increased due to worldwide concerns about global warming. Drivers of climate change are emissions of greenhouse gases, the main green-house gas being CO2 (Van Kooten, 2004). The Kyoto protocol went into effect in February 2005 and 195 participants have committed to reduce the emissions of greenhouse gasses in 2012. Freedman, M. and Jaggi, B. (2011) concluded in their research that the Protocol has led to improvement in pollution disclosures, but suggest that mandatory disclosure requirements may be needed to ensure more extensive and reliable environmental disclosures so that investors can make informed investment decisions. It will help investors become aware of the negative externalities an organization is accounted for.

What these investors are looking first and foremost for, is a clear explanation of the strategy, including how environmental, social and governance factors are integrated in the corporate strategy. Therefore, investors are critically monitoring how the performance in the fully integrated strategy is measured by performance indicators, which can be monitored over time. Reporting on strategy execution, measured through concrete performance indicators, still remains the key challenge in integrated reporting for the Dutch companies (PwC, 2012).

A framework for integrated reporting has been constructed by The Global Reporting Initiative (GRI) (Spotlight Special: Integrated reporting, 2012). Another widely accepted standard framework for the reporting of assurance engagements other than audits or

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reviews of historical financial information is the ISAE 3000, effected by the International Auditing and Assurance Standards Board (IAASB). A component of this integrated reporting is the GHG statement. The quantified GHG emission statement has been effected for assurance reports covering periods ending on or after September 30, 2013 by the IAASB. It defines a GHG Statement as “a statement that sets out the constituent elements and quantification of an entity’s GHG emissions for a period” (IAASB, 2012). There are different reasons why organizations could prepare GHG statements. In Australia it may be required by National Greenhouse and Energy Reporting System. It may also be needed for trading. An example is the European Union Greenhouse Gas Trading Scheme. Further disclosure is voluntary and no regulations have been set by governments.

Besides the ambitions of governments to solve the problems concerning climate change, their focus is on economic growth. Also organizations operate in times of high uncertainty, modest growth, and volatile commodity prices. These developments result in that organizations are increasingly asked by investors to show that they are flexible for these difficulties for the long-term. With this demand the Carbon Disclosure Project (CDP) sends its annual request to the Global 500 companies on behalf of 655 investors with US$78 trillion of assets, asking them to measure and report what carbon growth means for their business (CDP, 2012). This questionnaire gives us useful insight in the extent an organization is able to disclose its measures of carbon emissions, the comprehensiveness of the information that it provides on CO2-related actions, the depth of information given on the issues CO2 presents to the business, and whether it uses a third party for external assurance of its data in order to give confidence.

In the year of 2008 this rate of CDP questionnaire response rose from 48% to 58% of the S&P 500 organizations; a respectable growth. Stanny and Ely (2008) stated that for 2008 the amount of non-response in the CDP questionnaire was high. But the response rate grows rapidly. The year 2012 is the most recent year where CDP published its information gathered from their questionnaire. In this year 81% of the organizations responded to the questionnaire. This trend shows that investors are more and more able to compare organizations’ risks on climate change. These risks relate to all industries. Even organizations in less intensive carbon industries are influenced by the potential downstream effects on inputs. There is no organization that cannot be effected by this risk, because it is global.

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Relevance

Whether environmental information is being disclosed in annual reports has been examined in a study by Deegan and Rankin (1997) early before the seriousness of climate change has been recognized by the global society. Users of annual reports with financial accounting experience, including investors, have been interviewed and environmental performance information was found to be material. It was and is not as material as conventional financial performance information that organizations disclose, but Burritt (2012) indicates that there is an “ongoing interest” in the materiality of environmental performance information in scholar literature. Burritt (2012) concludes that environmental performance accountability continuous to be a more and more important issue. This environmental accounting issue is not discussed enough between accountants in academe and accountants in practice according to Lamberton (2005). Of the organizations participating in the CDP in 2012, 55% has an external verifier for their emissions statement. Part of this study researches the degree in which investors are valuing assurance on CO2, environmental information, from accounting organizations. This research is therefore a response to the need for relevant research on where accountants in practice are responding to the need for environmental accounting. It can be an argument in order to persuade their clients to choose an accounting organization instead of a non-accounting organization.

This research can also be important for management. Decisions on expensive investments which will reduce the emission of CO2 will help to decrease future costs (Sharfman and Fernando, 2008). The findings from this research can be considered by managers, because it can show that investments in the measurement and controlling of CO2 streams in an organization can be rewarded by its stakeholders (including investors).

Da Silva, R. V., & Teixeira, N. (2008) conducted a study in the Portuguese textile industry. The study focuses on the adoption of environmental management systems and corporate social responsibility reporting as mechanisms for creating a differential advantage. They interviewed different stakeholders in an organization. They conclude that the market now demands that compliance with environmental factors is a critical success factor in most export markets. Organizations fail to report on environmental issues and its link with the organizations abilities is still an issue. This study will cover the relevance of disclosure and assurance of CO2 specific information for investors and will therefore be relevant to organizations that try to be superior to their competitors.

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Literature

Prior studies give us reason to believe that investors assess CO2 emissions and its assurance of organizations when deciding to invest, because there is a positive link between environmental disclosure and investor value.

Traditional economic theory suggests that organizations tend to be reluctant to spend more on environmental regulations than prescribed by law. Arora, S. and Gangopadhyay, S. (1995) have come up with a theory why some organizations voluntarily over-comply with environmental regulation and built a theoretical model. According to the model all consumers find environmental disclosure important. When controlling for price and quality, consumers prefer to purchase products from organizations that have a better environment reputation. Organizations first choose a level of environmental standards they are willing to accept and then they compete in price with others. An important aspect in the model is affordability. Affordability depends on the ability for consumers to pay for products which are environmental friendly produced. This means for a poorer consumer that the same unit price has a greater “utility cost” than for a richer consumer. “The market gets segmented by income levels”. In the model, the availability of information about the production technology is crucial for consumers to assess preferences for environmental better performing organizations. Organizations will thus have incentives to disclose CO2 emission information, which is one of the by-products of their activities.

Another theory is the legitimacy theory. This theory discusses in the context of this study whether the disclosing of environmental information is related with the environmental performance of that organization. De legitimacy theory is based on the idea that an organization does not automatically have the right to exist. Organizations acquire their right to exist if society acknowledges its legitimacy. Such acknowledgment can be obtained by acting social and responsible and disclosing these actions. A “social contract” between an organization and society can be recognized (Gray, 1998). Organizations will also try to give focus to positive actions, rather than negative. This can be done by using optimistic rather than pessimistic language (De Waard, 2011).

Environmental performance disclosure and investor value

Blacconiere, W.G., Patten, D.M. (1994) did a research which concludes that investors value the fact that organizations have extensive environmental disclosures. They studied the market reaction by chemical organizations after a catastrophic leak occurred in India in 1984. Organizations that disclosed more extensive environmental information in their financial report prior to the catastrophe experienced less negative reaction than with less extensive disclosure. This suggests that investors see disclosure of environmental information as an indication that an organization is managing its exposure to future regulatory costs. This is where organizations gain a higher value on the markets, because at the moment regulatory costs are present for organizations, they are ahead of organizations that have not managed such exposures and investors can also see this by the extensiveness of their disclosure.

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Organizations that invest in assets that contribute to its environmental performance are valued by the market. Clarkson, P. M., Li, Y., and Richardson, G. D. (2004) examined whether environmental capital investments that reduce pollution in the pulp and paper industry were valued positively by the market showing that the environmental capital investment by low-polluting organizations leads to economic benefits. They also find that investors use environmental information to assess the unaccounted liabilities of high-polluting organizations. These unaccounted liabilities can be seen as the future needed environmental capital investments. Thus, investors can positively value an organization when it has already invested in these for the future needed measures.

Next to environmental performance the disclosure or announcement to take action on environmental problems can evoke short-term reaction on investors in terms of equity prices, but also in a long term such as the expectations on future abnormal earnings beyond current capitalization of earnings and book value. Hsu, A.W. H., and Wang, T (2012) concluded that when organizations experience negative media attention because they are not responding to the climate change have a significantly positive market reaction. This result implicates that investors are concerned that the costs to combat global warming can outweigh the benefits. The authors nevertheless stress that their results do not entirely rule out the possibility that actions against climate change could possibly be beneficial for investors for the long term. This limitation in their research suggests that investors possibly perceive the long-term benefits of saving costs when emissions are reduced higher than future political and regulatory costs concerning CO2 emissions.

Lastly, voluntarily disclosure of nonfinancial information gives benefits for organizations. This is supported by a study done by Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G. (2011). They find that there are benefits associated with the initiation of voluntary CSR disclosure. Organizations with superior social responsibility performance enjoy a reduction in their cost of equity capital and organizations dealing with a high cost of equity capital in a current year are more likely to disclose more about their corporate social responsibilities (CSR) in the following year. Organizations are thus more likely to disclose more nonfinancial information to reduce their cost of equity capital. This is consistent with their final findings that organizations which disclose a CSR report for the first time get the attention of institutional investors and analysts. An organization investing in measures and tackling uncertainty of future CO2 costs is important, but the disclosure of information that shows these measures is essential.

CO2 information disclosure and the investor value

Johnston, Derek M., Stephan E. Sefcik, and Naomi S. Soderstrom (2008) studied the market valuation of Sulfur Dioxide (SO2) emissions allowance held by US electric utilities. This market was studied, because a cap and trade market exists since 1995 for SO2. The organizations are able to purchase allowances and keep them for in the future. They concluded that these allowances are priced positively by the capital market. Although SO2 is not a GHG, the authors suggest that their work provides groundwork for

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further enquiry. The CO2 market in the European Union is becoming mature and it is an opportunity to explore how the market reacts to this GHG.

The disclosing of amounts of CO2 emitted could be an indicator for investors on how well an organization is aware of their environmental actions. To develop internationally accepted GHG accounting and reporting standards for business and to promote their broad adoption, The Greenhouse Gas Protocol Initiative (Ranganathan, J., Corbier, L., Bhatia, P., Schmitz, S., Gage, P., & Oren, K., 2004) was launched in 1998. To help calculate direct and indirect emission sources, improve transparency, and provide utility for different types of organizations and different types of climate policies and business goals, three “scopes” (scope 1, scope 2, and scope 3) are defined for GHG accounting and reporting purposes. Scopes 1 and 2 are carefully defined in this standard to ensure that two or more companies will not account for emissions in the same scope. Disclosing the quantification of these emissions is relevant to investors to some extent.

Matsumura, E. M., Prakash, R., & Vera-Muñoz, S. C. (2011) conducted research on the relation between the carbon emission levels and the firm value. They find a negative association in a sample of organizations in the S&P 500 and calculate that for every thousand metric tons of CO2 produced and disclosed in the CDP for the period from 2006 to 2008, the firm value decreases by $202,000. This shows that although there are no regulations for these organizations, the market is already valuing the effects of costs caused by emitting CO2. Investors in the equity market are thus taking CO2 in to account when making valuation decisions. This is an example of absolute CO2 emission amounts directly affecting an organizations value. Disclosing more than only absolute amounts of CO2 will help investors assess the long-term vision of an organization that mitigates costs concerning CO2 emission. These organizations that include sustainability goals in their strategy and have controls in place to measure these goals are less exposed to liabilities. This process can be defined as eco-efficiency management (Burnett, R. D., Skousen, C. J., and Wright, C. J., 2011). They did research on the extent in which investors valued the long-run benefits effected by eco-effective management. They find that eco-effective management increases the market valuation of an organization. This increase was also seen in the periods after the adoption of eco-effective management.

The foregoing researches show that the disclosure of environmental performance information and more specific information on CO2 emission by organizations give investors more information on their future performance. The CDP has collected information from organizations around the world on CO2 emissions and scored the extent in which they disclose information about CO2. This information is public and thus disclosing more information that shows to investors that goals are set, measured and managed will help investors assess and value such an organization higher than organizations that disclose less.

Hypothesis 1: The more information on CO2 emission an organization discloses, the higher its investor value.

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CO2 information disclosure and its assurance provider

The market for assurance on CO2 statements is a developing one. Multi-disciplinary teams are needed and accounting organizations are competing with non-accounting organizations in the market.

O’Dwyer (2005) finds that there is a demand by Irish NGO’s for “mandated, externally verified sustainability reporting in either the annual report, a separate stand-alone report, or to a lesser extent, the company website”. This demand was found by interviewing NGO’s which need information from organizations to hold them accountable. The lack of external assurance on carbon disclosure leads to doubts in the reliability of data and its underlying processes. According to Simnett, R., Vanstraelen, A., Chua, W.F. (2009) organizations with a greater need to enhance credibility towards stakeholders are more likely to assure their sustainability reports in general. It does not matter whether it was done by an accounting organization or a non-accounting organization. For CO2 information specific, there has been no research on whether there is a preference in assurance by an accounting organization or a non-accounting organization for investors. Huggins, Wendy J. Green, and Roger Simnett (2011) have showed that there are benefits for organizations of having GHG information assured and it is necessary to have assurance expertise as well as matter of subject expertise. They conclude that due to more and more GHG emission information disclosed in annual reports and integrated reporting, the accounting profession gains domain. Also due to emission trading schemes, the GHG information will be converted in financial terms. Since accountants have superior expertise in giving assurance on financial information, the trend of GHG allowances for buying and selling, gives them legitimacy in the market of CO2 assurance. Huggins et al. (2011) suggest further research on the decision usefulness of GHG statements for various stakeholders is needed.

This study suggests that when the processes that establish CO2 data are more visible in organizational external disclosure, investors value these higher than organizations that do not disclose information from which can be traced back that processes in the organization are imbedded to measure and control CO2 emission. Accounting organizations are specialized in auditing information and whether this information is financial or non-financial is plays no role.

Hypothesis 2: The assurance on CO2 information from an accounting organization leads to a higher investor value than the assurance from a non-accounting organization.

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The moderating effect of assurance provider choice on the CO2 information disclosure and investor value relationship

Managers possess information about their organization that investors do not have. The information gap managers and investors have can be described as information asymmetry. A lot of this information concerns the expected future performance. Because accounting regulation and auditing is imperfect, managers make considerations between making accounting decisions and the disclosure of additional information to the firm’s investors (Healy & Palepu, 2001). The voluntary disclosure theory suggests that organizations disclose additional information besides its financial information to stakeholders. Organizations disclose environmental information that shows they have a thoughtful strategy for responding to the emission of CO2 causing climate change. This is a motivation to disclose this additional beyond compliance information (Clarkson, P. M., Li, Y., Richardson, G. D., & Vasvari, F. P., 2008). They find a positive association between environmental performance and the level of discretionary environmental disclosures. Hodge, K., Subramaniam, N., and Stewart, J., (2009) find that investors’ perception on the credibility of this information is important and makes assurance on CO2 information relevant. They find that assurance increases the credibility of sustainability reports, which include CO2 information. They also state that the type of provider may influence the perception. For the market of assurance providers on sustainability information this issue is becoming increasingly important for accounting organizations, because the number of independent third parties providing this assurance is growing increasingly. Because the type of provider may influence the report users, it becomes important for client organizations to choose what is best for its organization. The choice could influence the relationship between the degree of CO2 information an organization discloses and the value investors give to this information in a way that it strengthens this relationship.

Hypothesis 3: Assurance from an accounting firm strengthens the relationship between the disclosure of CO2 information and investor value.

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Research method

In this section the research methodology will be described. Firstly, the population will be described. Secondly, the variables used to test hypothesizes will be discussed. Next, the empirical model to test hypothesizes 1 and 2 will be described and lastly, the moderator effect of assurance provider choice on the strength of CO2 disclosure and investor value relationship will be formulated in an equation.

Research methodology

The gathering of data for the research of this study will be done from different sources. These sources are combined to build the sample. The data for the first variable carbon disclosure score is derived from a report from the Global 500 CDP report 2011. The CDP has concentrated on requesting annual information from organizations around the world on CO2 emissions. This information is retrieved trough an online questionnaire. Organizations which like to participate in the project are asked to respond in the online Response System provided by CDP through its website. The questionnaire contains drop down options and tables have been included for ease of response (CDP, 2013). The CDP of the year 2011 is chosen, because this is the most recent data available. The set of questions in the CDP are requested by investors. Therefore the disclosure given in the CDP by organizations is directly intended for investors interested in the environmental performance of these organizations. In this way the CDP gives a more direct link with investor value, instead of the annual report, whereas the disclosure is intended for various stakeholders. This report is the starting point for the population.

Based on the gathered organizations from the CDP report the investor value variable is acquired by using the Orbis database. From Orbis the most complete information can be retrieved for 2011, because at the moment of writing, financial information on organizations are still being collected for the year 2012.

Lastly, data about the assurance provider choice will be collected. This will be done for all organizations from which both data of the carbon disclosure score and the investor value could be found. For these organizations the assurance provider choice will be gathered from the company’s website, annual- or corporate social responsibility report, or a stand-alone report. In this way there are multiple different sources used for gathering data.

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Population

The sample of our population depends on the respondents of the CDP. The population will be determined by the information that can be retrieved from the CDP Global 500 Report 2011. The Global 500 are the largest companies by market capitalization included in the FTSE Global Equity Index Series. In this report, the carbon disclosure scores of organizations participating with CDP are shown in the appendix. The data is collected partly from the data from the CDP and partly from Orbis. This means that both data sets need to be aligned per organization. When one or more variables cannot be found for one organization, this organization will be excluded from the sample. Stanny and Ely (2008) did a study on the voluntary disclosure motives of organizations in the CDP. They argue that organizations that are more subject to scrutiny are more likely to disclose their information via the CDP questionnaire. These organizations are more exposed to scrutiny because of their size, previous disclosures and foreign sales.

Independent variables

The independent variable is the degree in which an organization discloses information on CO2 in the CDP questionnaire. All answers are collected and analyzed by CDP in order to give the degree of disclosure a score (carbon disclosure score). This score is determined by assessing the following topics: the level in which an organization understands and discloses its company-specific exposure to climate-related risks and opportunities, the level of strategic focus and commitment an organization has to understanding the business issues related to climate change, emanating from the top of the organization, the extent to which an organization has measured its carbon emissions, the extent in which an organization has its internal data management practice in place for understanding CO2 emissions, including energy use, the frequency and relevance of disclosure to key corporate stakeholders and lastly, whether the organization uses third party for external assurance of emissions data to promote greater confidence and usage of the data. Al these topics are awarded with points. The amount of points awarded is divided by the total amount of points that could have been awarded. The fraction is then multiplied by 100, so the carbon disclosure score has a maximum of 100.

A score of 50 or lower indicates that the organization has a limited or restricted ability to measure and disclose climate related risks, opportunities and overall CO2 emissions. A score of 50 or lower is considered to be low. It shows that an organization has limited or restricted ability to measure and disclose climate related risks, opportunities and overall carbon emissions. A mid-range score between 50 and 70 shows an increased understanding and measurement of company-specific risks and opportunities related to climate change. When organizations score 70 or higher is shows that senior management understands the business issues related to climate change and are building climate related risks and opportunities into core business (CDP, 2011).

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Dependent variable

Investor value can be measured amongst others by using Tobin’s quotient (Tobin’s q). Anderson, Fornell, and Mazvancheryl (2004) discuss the ways investor value can be measured. They provide an overview of advantages and disadvantages. They argue that it is a good measure, because it is forward-looking, comparable across organizations, and is based on economic theory. The first characteristic fits well with the dependent variables, because it is its aim to measure an organizations future performance. Also, because the data consists of a variety of organizations in different industries, the comparability Tobin’s q makes it fit. Tobin’s q is the ratio of market value of the firm to the replacement cost of its tangible assets. These replacements costs are hard to calculate and therefore an approximation is being used. Daines, R. (2001) used a simplified ratio for Tobin’s q. The market value of an organization can be calculated by multiplying the amount of shares with the current share price. Because the population is based on the CDP Global 500 report, the values for the end of the year 2011 are used. Replacement cost is estimated from the book value of the firm’s assets. A ratio of 1 indicates that the market value of an organization is based solely on its assets. If the ratio is less than 1, it indicates that that the cost to replace a firm's assets is greater than the value of its stock. This implies that the stock is undervalued. When the ratio is higher than 1 the stock is overvalued and thus investors value the organization higher. This information can be retrieved from Orbis.

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Moderator variable

The moderator variable is assurance provider choice. The value of this variable can possibly be found in the annual report, a separate stand-alone report, or the company website. If an organization has assurance in a report disclosed, they should attach this report with the third party assurance alongside in the questionnaire of the CDP. There are five conditions this statement needs to have. Firstly it clearly has to relate to CO2 emissions. Secondly, it needs to relate to the relevant scope. Thirdly it needs to relate to the correct reporting year. Fourthly it needs to state the assurance standard used (see appendix). Lastly it needs to contain an assurance opinion or finding. When all these five elements are found in the statement, the variable is considered to have assurance. When the statement is approved as being a third party assurance statement on CO2 information, the third party providing the statement has to be identified as being an accounting organization or a non-accounting organization. Because organizations’ assurance procedures do not always run simultaneously with the CDP reporting cycle, they have the possibility to attach the previous assurance/assurance. When this is done, this statement is seen as the statement from the assurance provider. There are three values possible: There can be no assurance at all, assurance by an accounting organization or assurance by a non-accounting organization. Because of these possible values, two dummy variables will be needed for the statistical model.

Control variables

Three control variables which are commonly used are added to the analysis, namely firm size, firm performance and type of industry. Firm size is measured by the number of employees. Firm performance is measured by the net income. The types of industry are divided as followed:

Industry 1 Industry

Energy Utilities Materials

Industry 2 Consumer Staples Consumer discretionary Health care

Industry 3 Financials

Information technology Telecommunication services

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Statistical model

The moderator effect (Baron, R.M., and Kenny, D.A., 1986) of assurance provider choice (APC) will be calculated by the following formula:

Investor value = β0 + β1* CO2 information disclosure + β2* Assurance provider choice + β3* CO2 information disclosure * Assurance provider choice + i

Moderation model:

The variables have to be checked on multicollinearity first, this is to check if the variables are not interfering with each other. If they do, the variables affect each other in the equation and not the dependent variable. This may be an issue and therefore we check if the multicollinearity coefficient is not greater than 0,7. To reduce the influence of outliers, we winsorize the data used for the regression analysis. This means that all values will be set at an equal of three times the standard deviation. This will be done for both negative and positive values. These two actions are standard procedures before doing regression analysis.

We will firstly calculate the correlations between all variables to look for significant relationships and multicollinearity.

Hypothesis 1 predicts that organizations which disclose more information on CO2 emission have a higher investor value than organizations that do not. A regression analysis with the degree of CO2 information disclosure as independent variable and investor value as dependent variable will be conducted.

Hypothesis 2 predicts that the choice of assurance on CO2 information from an accounting organization leads to a higher investor value. A regression analysis with assurance provider choice as independent variable and investor value as dependent variable will be conducted.

Hypothesis 3 predicts that assurance on CO2 information from an accounting organization will strengthen the relationship between the degree of CO2 information disclosure and investor value. In order to calculate the assurance provider choice moderator effect on the CO2 disclosure and investor value relation, the standardized versions off all independent variables are needed. This means we have to standardize CO2 information disclosure and assurance provider choice. By multiplying these two variables

CO2 information disclosure Investor value

H1+

H2+ Assurance provider choice

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we get a new variable; the interaction term. A regression analysis is done for the standardized variables and the interaction term as independent variables and Tobin’s q as dependent variable. This gives information on hypothesis 3.

We also see for our whether there is a significant relation between the degree of carbon disclosure and investor value for the categorized types of industry. For each industry group a regression with the assurance provider moderating effect is done. Also we check whether there is a difference in the relationship between the degree of carbon disclosure and investor value for all the organizations that have an accounting organization as assurance provider on their CO2 information and the organizations which have a non-accounting organization assuring their CO2 information.

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Empirical results

Table 1 shows that the correlation between assurance provider choice and the carbon disclosure score is a positive relationship of 0,544 and therefore the highest of all variables including the variables for controlling. The maximum of 0,7 for mulitcollinearity is not exceeded and therefore multicollinearity is not an issue in the further analysis. To reduce the influence of outliers, the data is winsorized. This means that all values two times the standard deviation above the mean will be set at this limit. This will be done for both negative and positive values. These two actions are done for all data. Table 1 Correlations Tobin’s q Carbon disclosure score Assurance Provider

Industry Employees Net income

Carbon disclosure score -,135** N=375 Assurance Provider -,091 ,544** N=375 N=375 Industry -,142** -,033 -,088 N=375 N=375 N=375 Employees -,231** ,212** ,150** ,050 N=299 N=299 N=299 N=299 Net income -,089 ,127* ,136* ,022 ,343** N=358 N=358 N=358 N=358 N=284

**. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is significant at the 0.05 level (2-tailed).

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Table 2

Results of regression analysis of carbon disclosure score and assurance provider as independent variables, N=375 B T Sig. R Square F Carbon disclosure Score -,135 -1,973 ,049 ,018 6,887 Assurance -,091 -,417 ,677 ,008 3,128

a. Dependent Variable: Tobin’s q

Table 2 shows the results of a regression analysis done for all the 375 organizations of the population. The results show that the investor value for organizations has a significant negative relation with the score they have been given for the degree of carbon disclosure. There is also a negative relationship between assurance on CO2 information and investor value, but not significant. In this regression only the difference of having assurance or no assurance at all is determined by assurance provider. No support can thus be found for hypotheses 1.

The slope (B) of the carbon disclosure score is -0,135. This is a negative slope and implies that investor value decreases when assurance provider or carbon disclosure score increases. R square for assurance provider is, assurance provider is responsible for 0,08% of the variance of investor value. Carbon disclosure score has a little higher percentage: of 0,18%. These percentages are very low and it shows that investor value is affected by many more factors.

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Table 3

Results of regression analysis of carbon disclosure score and control variables

B t Sig. Carbon disclosure score -,135 -1,973 ,049 R Square = 0,069 F = 5,519 Industry -,070 -1,307 ,192 Employees -,261 -2,983 ,003 Net income -,055 -,450 ,653

Table 3 shows no significant relationship between the type of industry and firm performance. A surprising outcome is the significant negative relationship between the amount of employees working at an organization and the investor value. This control variable was further tested to check for a moderator effect on the relationship between the degree of carbon disclosure and investor value, but no significant moderator effect was found. All control variables are tested for a moderating relationship, but no significant moderator effect was found.

Table 4 Moderating effect, N=151 B t Sig. Standardized Carbon disclosure score -,122 -,313 ,755 R Square = 0,020 F = 2,528 Standardized Assurance Provider -,093 -1,489 ,139 Moderating effect -,026 -1,130 ,260

From table 4 the equation of the moderator effect can be derived: Investor value = 0,788 – 0,122 × Carbon disclosure score – 0,093 Assurance provider + 0,026 × Carbon disclosure score × Assurance provider+ i

For this regression only the organizations with assurance on their CO2 information were selected. When only those organizations are included the sample has a total of 151

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organizations. In this way the moderator effect from assurance provider choice can be tested.

Regression analysis has not found a significant moderator effect. The results show that there is no significant relationship between assurance provider choice and investor value. Also, assurance provider choice does not moderate the relationship between the degree in which organizations disclose information about their CO2 emission and its investor value. Hypothesis 2 and 3 are not supported.

Table 5

Three types of industries

Independent

variable B t. Sig. R Square

Assurance provider Moderator Sig. Industry 1 N=138 Carbon disclosure score -,004 -,879 ,383 ,012 ,910 Industry 2 N=102 Carbon disclosure score -,005 -4,55 ,652 ,006 ,249 Industry 3 N=135 Carbon disclosure score 2,413 1,287 ,204 ,033 ,609

Further analysis is done to check for significant relationships in different types categories of industries. The following industries are categorized: Industrials, Health Care, Financials, Consumers, Energy, Utilities, Materials, Information Technology, and Communication Services. Regression for a relationship between all variables or moderator effect has been done for all sectors, but no significant relationship is found. Table 5 shows that there is no significant relationship between carbon disclosure score and investor value when including only industry 1 in the data. This conclusion can also be made when only including the industries 2 and 3. The slope of the carbon disclosure score is positive and high for the group of financials, information technology and telecommunication services. In case of the other industries investor value decreases when carbon disclosure score increases, B = -0,004 and B = -0,005. But the significances of industry 1 and 3 are high, respectively 0,383 and 0,652. This means for the financial, information technology and telecommunication service the chance of having a relationship between the degree of carbon disclosure and investor value is the highest. For the industrials, utilities, energy and materials the change of an existing relationship is less and for the consumer and health care the relationship is the lowest.

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Table 6

Assurance from accounting organization or non-accounting organization

B t. Sig. R Square Accounting organization Carbon disclosure score -,007 -1,148 ,255 ,018 Non-accounting organization Carbon disclosure score ,004 ,524 ,602 ,004

From table 6 can be derived conservative that a stronger relationship between the degree of disclosure of carbon information and investor value exists for the organizations that have their CO2 information assured by an accounting organization (0,225 against 0,692). This relationship is nevertheless not significant. The direction of this relationship is a negative.

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Conclusion and Discussion

The main goal of this study was to see if investors assessed information about CO2 disclosed by organizations positively (hypothesis 1). Assurance from an accounting organization on this information is hypothesized to make the investor value higher of organizations than other assurance providers (hypothesis 2). Further this study wanted to find out whether assurance from an accounting organization is superior to non-accounting organizations in the view of investors (hypothesis 3). None of the hypothesis could be proved right and therefore the answer to the main research question of this study is negative.

The only significant relation can be found in hypothesis 1. There is a negative relationship between the degree of CO2 information disclosure and investor value. This is not the hypothesized direction. An explanation can be found in the little influence the degree of disclosure of CO2 information has on the considerations investors make when deciding to invest in certain organizations. The R square in the empirical results section show very low percentages and therefore the evidence is given that many other factors will influence the investor value. Another interpretation of the negative direction can be found in the attitude from investors towards their decision whether to invest or not. The rationale for investors to choose certain organizations can be found in the discussion Hsu, A.W. H., and Wang, T (2012) have had in their research. They examined the cumulative abnormal stock return around news events with negative or positive tones on climate change. Their results show that investors perceive it as good news when organizations are not willing to take actions in limiting their CO2 emissions. This could be interpreted by the short-term orientation that investors have. As stated in the literature above, based on information on CO2, investors are able to make an opinion about the value an organization has for the long-term. This is because they are able to assess the management reaction to climate change, the extent of controls to measure CO2 emissions and the activities in place to mitigate CO2 costs. The costs that are entailed with this are namely focused on returns for the long-term. Investors focused on short-term positive returns are not interested in this type of activities and the disclosure of information on these activities. Thus short-term oriented investors could assess an organization with a high carbon disclosure score as a less attractive investment.

Besides the result that there is no significant relationship between having assurance or no assurance at all on CO2 information and investor value, there is no significant relationship on the type of assurance provider on investor value. The only conclusion that can be made is that for organizations in the financial, information technology and telecommunication service industries has the highest chance of having their investor value influenced by having assurance on CO2 information. This industry type has the smallest amount of carbon emission and further research is needed to gain insight in this outcome.

Further when having assurance, the chance of a relationship between the carbon disclosure score and investor value is higher for organizations with assurance from an accounting organization. This relationship is negative, but is irrelevant for the acceptation of hypothesis 2. There is no evidence to support hypothesis 3. No significant moderator

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effect was found. Also, for all organizations with assurance there was no significant relation between the carbon disclosure score and investor value when dividing the two types of assurance providers in groups. Organizations with assurance from an accounting organization were found to have a stronger relationship than organizations with other assurance providers. The limitation of the little role CO2 performance in organizations have in the assessment by investors mentioned earlier in this conclusion is also applicable. This nevertheless does not undermine the importance CO2 emission performance has in organizations. In the future organizations will be more accountable by investors and stakeholders when it comes to CO2 emission performance. This performance will have effect on the performance on organizations’ activities and business. Indirectly the managing of CO2 and other stakeholder oriented interests will have its effect on the value investors give to an organization.

Limitations

The basis of the population of the research of this study is derived from the CDP Global 500 report. This gives a comprehensive view on all types of organizations in the world. All types of industries and different countries are covered. The type of report makes it that all of the organizations in the population are equally of size. All organizations are chosen based on their market capital and are the world’s largest organizations. With this limitation there can be no conclusions derived for small and medium sized organizations. The idiosyncrasies of small and medium sized organizations can have an impact on the way they cope with CSR compared to large organizations (Russo, A. and Perrini, F., 2010).

Another considerable limitation is the degree in which investor value can be explained by the degree of disclosure of information on CO2 by organizations. The small R square in the output of the regression analysis supports this limitation.

Because of limitations in gathering data for the different variables, merely one year of data was acquired. This gives the research a snapshot of the year 2011 and a more reliable result could be obtained when more years are included in the research method. As mentioned above in the introduction, the financial crisis was going in this year and has influenced the priorities of governments are not mainly with climate change. Organizations are affected by these developments and this gives a distorted image. The use of the disclosure score from the CDP for scoring organizations all over the world has become an accepted method for organizational comparisons. The score has been generated by criteria which represents a subjective view. This will influence the scores of the index (Marston & Shrives, 1991). It will be difficult to include all factors which will be a perfect representation of the degree of disclosure.

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Appendix I: Table of emissions, scores

and sector information by company

Please refer to the Key on page 77 for further explanation of the abbreviations used.

Company Sector 2011 Response status 2010 Response status Carbon disclosure score Carbon performance band Non-Public Total Emissions

1

Scope 1 Scope 2 Scope 3 Scope 3 source type Verification/Assurance

2

Target(s) Implemented

3M Industrials AQ AQ 76 C 6250000 4300000 1950000 - † Int

A.P. Moller -

Maersk Industrials AQ AQ 74 C 39076000 38516000 560000 - 3 Abs Int

ABB Industrials AQ AQ 72 C 1469000 714000 755000 645000 Tr † Int

Abbott

Laboratories Health Care AQ AQ 72 C 1609000 838000 771000 1338000 TI Wa Tr EC Ld 3 Abs Accenture Information

Technology AQ AQ 93 B 212599 14270 198329* 366942 Tr 3 Int

Ace Ltd Financials AQ AQ 82 B 56406 14741 41665 10213 Tr 3 Int

Aflac Financials AQ AQ 66 E 27721 4352 23369 - †

Air Liquide Materials AQ AQ 87 B 19475000 10181000 9294000 - Oth 3

Air Products &

Chemicals Materials AQ AQ 92 A 23691275 14366791 9324484 97169 Tr TSP 3 Int

Akbank Financials AQ AQ 72 C NP - - - -

-Alcon Health Care DP DP - - - - -

-Allergan Health Care AQ AQ 83 B 95299 42674 52625 15296 TI Tr 3 Abs

Int Allianz Financials AQ AQ 92 A- 339817 41496 298321* 171087 PGS Wa

Tr Oth 3 Int

Allstate Financials AQ AQ 89 C 218978 35504 183474 33543 Tr Oth †

Altria Group Consumer Staples AQ AQ 67 C 524631 273437 251194 41799 PGS Tr † Abs Amazon.com Consumer

Discretionary NR DP - - - - -

-Ambev - Cia. Bebidas das Americas

Consumer Staples AQ AQ 69 C 1048442 865202 183240 29886 PGS † Int

América Móvil NR NR - - - - -

-American Electric

Power Utilities AQ AQ 75 C 138294800 138294800 - 1634883 PGS Fu TI Tr † Abs American

Express Financials AQ AQ 80 C 221850.56 32504.01 189346.55* 38143 Tr 3 Abs American Tower AQ AQ 63 C 144379.34 5819.79 138559.55 8953.97 Tr EC †

Amgen Health Care AQ AQ 66 E 430983 136986 293997 36340 Tr † Abs

Anadarko

Petroleum Energy AQ AQ 75 B 8770874 7872285 898589 - 3

Anglo American Materials AQ AQ 81 C 19999891 9809076 10190815 177645320 Tr USP † Abs Anglo Platinum Materials AQ AQ 85 B 5611738 457336 5154402 466194.51 PGS TI

Wa Tr EC TSP USP

DSP

3 Int AngloGold

Ashanti Materials AQ AQ 74 C 4697000 1215000 3482000 - 3 Int

Anheuser Busch

InBev Consumer Staples AQ AQ 77 B 4353161 2901360 1451801 12283 TI Tr † Int Antofagasta Materials AQ AQ 59 E 1294371 529560 764811 47373 Fu Tr Oth †

Apache Energy AQ AQ 65 D 10900000 9860000 1040000 - †

Apple Inc. Information

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Appendix I: Table of emissions, scores and sector information by company

1

2

Target(s) Implemented

Arcelor Mittal Materials AQ AQ 34 - 184825000 165226000 19599000 - † Int Archer Daniels

Midland Consumer Staples NR NR - - - - -

-Assicurazioni

Generali Spa Financials AQ AQ 68 C 65745.5 12506.2 53239.3* 29090.3 Tr Oth † Abs Int Astellas Pharma Health Care AQ AQ 60 D 1225638.27 457296.87 768341.4 1999.84 TI † Abs Astra

International Consumer Discretionary AQ(L) NR - NP - - - -

-AstraZeneca Health Care AQ AQ 68 C 679391 385210 294181* 365716 PGS TI Wa Tr

USP

† Abs

AT&T AQ AQ 72 C 8903473 1105251 7798222 63209 Tr †

Atlas Copco Industrials AQ AQ 72 C 116000 25000 91000 202000 TI † Int

Australia and New Zealand Banking Group Financials AQ AQ 89 B 220577 18278 202299 101090 PGS Fu Wa Tr 3 Abs Int Automatic Data

Processing Information Technology AQ AQ 25 - 173000 18000 155000 - †

Aviva Financials AQ AQ 80 B 132412 63784 68628* 15839.7 Tr EC 3 Abs

AXA Group Financials AQ AQ 92 A 245701 68554 177147 214266 Tr EC 3 Int

BAE Systems Industrials AQ AQ 56 E NP - - - -

-Baker Hughes Energy AQ AQ 67 D 600000 300000 300000 116600 Tr 3 Int

Banco Bradesco Financials AQ AQ 47 - 24875 4554 20321 24216 EC Oth 3 Banco do Brasil Financials AQ AQ 54 E 35838 6071 29767 8869 Tr Oth †

Banco Santander Financials AQ AQ 85 C 453442.19 29882.19 423560 128666.05 Tr EC 3 Banco Santander

Brasil Financials AQ IN 67 D 19561 5541 14020* 94744 Wa Tr SEPGS TI ¢ Abs Banco Santander

Chile Financials AQ(SA) AQ(SA) - - -

-Bank Central

Asia Financials NR NR - - - - -

-Bank Mandiri Financials NR NR - - - - -

-Bank of America Financials AQ AQ 97 A 1872213 119760 1752453* 1052130 TI Wa Tr

EC 3 Abs

Bank of China Financials NR IN - - - - -

-Bank of Communications (H)

Financials AQ AQ(L) - NP - - - -

-Bank of Montreal Financials AQ AQ 88 A 64907.87 16545.66 48362.21 92796.19 Wa Tr Lu

TSP 3 Abs Bank of

Nova Scotia (Scotiabank)

Financials AQ AQ 54 D 86362 17560 68802 3075 Tr †

Barclays Financials AQ AQ 89 B 993000 57000 936000 110000 Tr 3 Int

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Carbon Disclosure Project 2011 – Global 500 Report

58

1

2 Target(s) Implemented BASF Materials AQ AQ 93 A 25701000 21312000 4389000 134289000 PGS Eq Fu TI Wa Tr EC Lu In TSP USP DSP 3 Abs Int Baxter

International Health Care AQ AQ 74 C 801000 339720 461280* 2144000 TSP USP Tr EC DSP SE

3 Abs Int Bayer Health Care AQ AQ 99 A 8500000 4800000 3700000 27009800 PGS TI Tr

Lu DSP Oth

3 Abs Int

BB&T Financials AQ AQ 58 E 172066 1643 170423 - †

BBVA Financials AQ AQ 74 B 329870 8494 321376 35232 Tr 3 Int

BCE AQ AQ 74 C 234529 93132 141397 4348 Tr † Abs

Becton, Dickinson and Co.

Health Care AQ AQ 43 - 530124 61975 468149 - † Abs

Int Belle

International Consumer Discretionary NR NR - - - - - -Berkshire

Hathaway Financials NR NR - - - - -

-Best Buy Consumer

Discretionary AQ AQ 70 B 940696 236170 704526 - 3 Abs

BG Group Energy AQ AQ 85 A 7974747 7951198 23549 88692000 USP 3 Abs

Bharat Heavy

Electricals Industrials NR NR - - - - -

-Bharti Airtel NR NR - - - - -

-BHP Billiton Materials AQ AQ 73 B 45731137 19591969 26139168 325311000 Fu USP 3 Int BM&F Bovespa Financials AQ AQ 81 C 1179.67 155.57 1024.1 1746.81 TI Wa Tr

EC 3

BMW Bayerische

Motoren werke Consumer Discretionary AQ AQ 96 A 1343008 409911 933097 38186203 TI Tr EC USP 3 Abs Int

BNP Paribas Financials AQ AQ 78 C 535513 86808 448705 166392 Tr †

BNY Mellon Financials AQ AQ 81 B 211570 9474 202096 26827 Tr † Abs

BOC Hong Kong Financials DP NR - - - - -

-Boeing Industrials AQ AQ 92 B 1717000 595000 1122000 255000 Tr 3 Abs

Int

BP Energy AQ AQ 80 B 74920000 64920000 10000000 573000000 USP 3

Bristol-Myers

Squibb Health Care AQ AQ 76 D 524189 253398 270791 73480 Tr † Abs

British American

Tobacco Consumer Staples AQ AQ 91 A 743599 371610 371989 58518 Wa Tr Oth 3 Int British Sky

Broadcasting Consumer Discretionary AQ AQ 90 B 152580 27462 125118* - Oth 3 Int

BT Group AQ AQ 84 B 1674583 204497 1470086* 48434 Wa Tr

Oth † Abs Int BYD Company Consumer