The Effect of the Implementation of the Decree
on the Publication of Non-Financial Information
on Environmental Disclosure in Management
Reports of Dutch listed companies
Master thesis, MSc Accountancy
University of Groningen, Faculty of Economics and Business
February 15, 2019
Sieuwke Bosma
S2523671
University of Groningen
Supervisor: dr. S. Mukherjee
Assessor: dr. A. Bellisario
ABSTRACT: According to Directive 2014/95/EU on disclosure of non-financial information from 2017 onwards, large public listed firms headquartered in the Member States will be required to provide a series of social, environmental and governance statements. The Directive was included in the Dutch law called “Besluit bekendmaking niet-financiele informatie”. As the Netherlands is a high disclosure country, the necessity of the Decree seems questionable. The aim of this thesis is twofold. Firstly, this study analyses the content, i.e. the disclosure requirements stated in the Decree. Secondly, it investigates the current state of environmental reporting of Dutch listed companies and if the firms complies with the new requirements by comparing the environmental disclosures in management reports a year before and after the implementation of the new regulation. Using a data set of 108 firm-years publicly listed firms from the Netherlands over the period 2016 and 2017, this study finds that there is a positive and significant relationship between the implementation of the Decree and environmental disclosure in management reports.
Keywords: Directive, non-financial, reporting, environment, mandatory disclosure, voluntary disclosure
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TABLE OF CONTENTS
I. INTRODUCTION ...3
II. LITERATURE REVIEW AND HYPOTHESES DEVELOPMENT ...5
Introduction to Directive 2014/95/EU ...5
Implementation of Directive 2014/95/EU in the Dutch Law ...5
Article 2:391 Paragraph 5 Dutch Civil Code ...5
The Decree on the Publication of Non-Financial Information ...6
Responsibilities Auditors According to the Decree on Non-Financial Information ...7
Implementation of the Directive 2014/95/EU in Other European Countries ...7
Previous Research on Implementation of Directive 2014/95/EU and the Decree on the Publication of Non-Financial Information ...7
III. HYPOTHESIS DEVELOPMENT ...7
IV. RESEARCH METHODOLOGY ... 10
Sample and Data ... 10
Variable Measures ... 10
Emperical Model ... 12
V. RESULTS ... 12
Descriptive Statistics ... 12
Test Results ... 14
VI. CONCLUDING DISCUSSION ... 17
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I. INTRODUCTION
On the April 15th of 2014, the European Parliament adopted Directive 2014/95/EU which obliges large public listed firms to report non-financial information on diversity in management reports, effective from financial year 2017 (Directive 2014/95/EU). The goal of the Directive is to affect how business is managed. Recital 3 of the Directive states: “Disclosure of non-financial information is vital for managing change towards a sustainable global economy by combining long-term profitability with social justice and environmental protection”. The Directive is based on minimum harmonization, which means that the undertakings of the European Union, i.e. the Member States, have been left with some freedom regarding implementing the Directive in their national law. In the Netherlands, the basis for the implementation lies in section 2:391 of the Dutch Civil Code, which states the minimum requirements on annual reports in general (BW, 2:391). The additional requirements, which specifically focuses on the non-financial information in management reports, are included in an Order in Council called: “Besluit bekendmaking niet-financiele informatie” (hereinafter ‘the Decree’) and is adopted on the 14th of March 2017. As previous literature shows, before the implementation of the Decree, the Netherlands was already a high disclosure country (Gray, 1988; Vanstraelen et al., 2003) and stakeholders as well as entities already found social justice and environmental protection of paramount importance (Graafland et al. 2003). Therefore, the implementation of Directive 2014/95/EU as well as the Decree have raised several concerns: the entry of the Decree could be deemed outdated and its effectiveness might be questionable (NBA, 2016; Kinderman, 2016; Matuszak & Różańska, 2017; AFM, 2018). This thesis intends to investigate the effect of the implementation of the Decree on environmental disclosure in management reports of Dutch publicly listed firms by comparing the management reports one year before the effective date and the year of the effective date of the Decree.
Information is at the heart of best functioning capital markets. In previous research Akerlof (1970) shows how capital markets can break down when potential buyers face a situation where they cannot verify the quality of the product they are offered, due to limited information. Faced with the risk of buying a ‘lemon’, the average willingness to pay by buyers decrease, which in turn discourages the potential sellers who may not be selling lemons. Healy and Palepu (2001) explains that this is a form of unevenly distributed information, which is also known as asymmetric information. An important information source in capital markets to reduce information asymmetry is disclosure. Disclosure can be defined as the communication of economic information, both financial and non-financial relating to the financial position and performance of an organization (Wallace & Naser, 1995; Owusa-Ansah, 1998; Propova et al., 2013). Freeman (2005) states that a publicly listed firms’ behavior reflects and can be predicted by the nature of its diverse stakeholders, i.e. the norms that the stakeholders adopt to define right or wrong. As previously mentioned, in the Netherlands stakeholders as well as public listed firms already find social justice and environmental protection of paramount importance (Graafland et al. 2003) which results in the Netherlands being a high disclosure country concerning Corporate Social Responsbility (CSR) (Gray, 1988; Vanstraelen et al., 2003). Based on Freemans study it is predicted that the implementation of the Decree will not lead to significant changes in the environmental disclosure in management reports. In addition to before mentioned, it is predicted that due to overregulation, the implementation of the Decree could be a wastage of public money, as regulations are costly in terms of parliamentary time (Manne, 2006).
In order to evaluate the changes in environmental disclosure, I create a score, based on the specific items concerning the requirements on environmental disclosure of the Decree. This study uses a panel dataset of 108 firm-year observations, representing 54 unique (non-financial and non-utility) Dutch listed firms over the years 2016 and 2017. Opposite of the predicted, a positive association between the implementation of the Decree and environmental disclosure in management reports is found,
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suggesting that an increase in regulation leads to an increase in disclosure.
This thesis makes several contributions to the literature. Firstly, by analyzing and comparing the environmental disclosure of management reports of Dutch corporations in 2016 and 2017, I provide cleaner evidence on the causal relationship between regulations and corporate environmental disclosure. Many previous researches on the relationship between Directive 2014/95/EU and disclosure in management reports have been performed before the Directive was officially effective, which means disclosures were performed on voluntary bases (Černe et al., 2017; Venturelli et al., 2017; Matuszak & Różańska, 2017, Ogrean, 2017; Saenger, 2017).
Secondly, this thesis broadens the understanding of aspects which influence the environmental disclosure. The Dutch Authority for the Financial Markets (AFM) published a report where it reviews all the corporations that fall under the scope of the Decree to establish how they were implementing the Decree in their management reports for the financial year 2017 (In Balance 2018, AFM). This thesis adds to this previous research by taking into account the indirect role of the industry, firm size, profitability and leverage. I thereby provide comprehensive evidence that leverage has a negative influence on environmental disclosure.
Thirdly, the before mentioned report published by the AFM focused only on the management reports for the financial year 2017. This study adds the comparison with the management reports of the financial year 2016. The changes between both reports are significant at the level of disclosure on the results of the environmental reporting and disclosure on the environmental Key Performance Indicators (KPIs). No significant change is found on environmental risks disclosure.
In the fourth place, this thesis is closely related to the growing literature of the influence of legislation on disclosure in general. I add to this literature by examining the specific effect of a new legislation on environmental disclosure on management reports. The effects of voluntary and mandatory legislation on disclosures is a frequently researched subject, and studies have presented this as a suggestion for further research (Matuszak & Różańska, 2017).
Finally, the practical relevance of this thesis is that research on the impact of legislation on environmental disclosure is informative to regulators and standard setters to further extent the requirements in the Directive and the Decree, as mandatory regulations on environmental disclosure seems to increase the extent of disclosure in management reports. Moreover, this research could be useful to boards of directors by comparing their own compliance on the Decree in relation to the other Dutch listed entities which are applicable to the Decree. Additionally, these findings are relevant to investors and other users of management reports in evaluating the environmental disclosure in management reports.
The remainder of this thesis is organized as follows. The following section describes the relevant prior literature and the hypotheses development. The third section presents the research design and variable measurement. The results are presented in the fourth section, the fifth section contains the discussion and conclusion.
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II. LITERATURE REVIEW
Introduction to Directive 2014/95/EU
The Directive aims to promote transparency of EU public interested entities (PIEs) with regard to non-financial information in order to contribute to measuring, monitoring and managing the performance of the PIEs and their impact on society (Recital 3, 2014/95/EU). The directive 2014/95/EU is based on the “comply-or-explain” model; this means that if no policy is implemented in these areas, this must be explained with motivation. The non-financial information directive is based on minimum harmonization, which offers member states a number of choices when implementing the directive. First of all, it is possible that member state may allow certain information, relating to impending developments or matters to be negotiated, to be omitted from the non-financial statement if such information would seriously harm the commercial position of the undertaking. The conduction for the omission of this information is that the missing information must not stand in the way of a true and balanced representation of the company and its performance. Furthermore, member states may provide that the company that publishes an independent non-financial statement (such as a CSR report) may be exempt from the obligation to include this non-financial statement in the management report. The separate report must then either be published simultaneously with the management report or made available within a maximum of six months after the balance sheet date. It is required that Member States ensure that a competent auditor checks whether the non-financial statement is included. The content of the non-financial information statement does not need to be verified. Member states are free to prescribe such a check. In addition, member states are free to define if any penalties will be imposed upon organizations which fail to report adequately.
Implementation of Directive 2014/95/EU in the Dutch Law
Directive 2014/95/EU is based on minimum harmonization, which means that the undertakings of the European Union, i.e. the Member States, have been left with some freedom regarding implementing the Directive in their national law. In the Netherlands, the basis for the implementation lies in section 2:391 of the Dutch Civil Code, which states the minimum requirements on annual reports in general (BW, 2:391). The additional requirements, which specifically focuses on the non-financial information in management reports, are included in the Decree on the publication of non-financial information.
Article 2:391 Paragraph 5 Dutch Civil Code
On July 5 of 2016, the second chamber adopted the legislative proposal to amend article 2:391 paragraph 5 of the Dutch Civil Code. As a result, paragraph 5 is worded as follows:
“Additional requirements may be set by Order in Council regarding the content of the annual report. These additional requirements may relate particularly to the compliance with a code of conduct which is pointed out for this purpose in that Order in Council and to the content, disclosure and audit of an opinion (certificate) on corporate governance”.
In relation to article 2:391 the Dutch law implemented three additional requirements set by Order in Council which are:
1. The decree on the publication of the diversity policy 2. The decree on the content of the management report 3. The decree on the publication of non-financial information
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on non-financial information. This is because I wish to remain focused on environmental transparency, especially with regards to the issue of climate change.
The Decree on the Publication of Non-Financial Information
The additional requirement set by Order in Council, which has been adopted in the Dutch law on the 14th of March 2017 and is called “Decree on the publication of non-financial information”. The Decree is applicable to large PIEs. The Dutch law, “Wet Toezicht Accountantsorganisaties” (WTA) article 1L, qualifies an organization as a PIE if they:
1. Have securities listed on a regulated market in an EU Member State; or 2. Are a credit institution; or
3. Are an insurance company; or
4. Are part of an organization, institute or public body designated by the Dutch Member State as PIE
To date, no organizations, institutes or public bodies have been designated by the Dutch Member State as PIE. In October 2018 the Dutch minister published a draft of a Decree indicating organizations of public interest, which states that in the future the following organizations will be designated as PIE: (larger) pension funds, (larger) housing corporations, network managers and institutions for Research.
According to article 1 of the Decree on the publication of non-financial information PIEs are considered large if:
1. They employ more than 500 employees on average in that financial year; and
2. They have a balance sheet total of more than 20 million or a net turnover of more than 40 million 3. For parent organizations, the consolidated figures of the entire group are examined to determine whether the law is applicable. The parent organization is then also obliged to provide insight into the non-financial information of the entire group. A subsidiary organization is exempt from the reporting. This also applies when the daughter is an intermediate holding company and reports the parent organization.
Article 2 states that the entity has to publish a non-financial statement as part of the management rapport. According to article 3 paragraph 1, at least the following must be included in the non-financial statement: 1. The business model of the legal entity; and
2. The policy pursued in relation to the environment, social and personnel affairs, respect for human rights and the fight against corruption; and
3. The results on the pursued policy in relation to the environment; and
4. The principal risks meaning those that are associated with subjects for that legal person as a result of the activities of the legal entity and its business relations, products or services; and
5. Which non-financial performance indicators are important for the business activities of the legal entity. According to article 3 paragraph 4, in exceptional cases, the requirements stated in article 3 paragraph 1, may be omitted if the disclosures relate to pending developments or matters being negotiated and disclosing this information would seriously damage the commercial position of the legal person. Not disclosing information shall not stand in the way of a fair and balanced understanding of the developments, results position of the legal person and the effects of its activities.
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Responsibilities Auditors According to the Decree on Non-Financial Information
On the basis of the new legislation, the non-financial statement must be published as part of the management report and thus be included in the auditors tests. For the organizations that fall under the scope of the new legislation, the auditor must check whether all aspects of the non-financial statement have been included (attendance test). In addition, the accountant must verify whether this statement is compatible with the annual accounts and contains no material inaccuracies in the light of the knowledge during the audit of the annual accounts (compatibility test).
Implementation of the Directive 2014/95/EU in Other European Countries
Before the implementation of Directive 2014/95/EU, some European countries (Spain, France, Portugal, Finland, Sweden, and Denmark) had already implemented disclosure regulations in their national laws concerning environmental and social issues.
In both Denmark, Sweden and France, transparency legislation has been adopted that goes beyond the non-financial information directive. For example, in Sweden the scope is applied more widely than in the Netherlands, legal entities with more than 250 employees are already eligible.
Another difference is that certain member states have made the disclosure of non-financial information mandatory. Others have adopted a “comply or explain” approach. The subject scope of the requirements also varies. Certain member states subjected large companies to mandatory reporting, while other states only required listed companies or state-owned enterprises to report. Some member states refer to international reporting guidelines, while others have set up their own national reporting guidelines.
Previous Research on Implementation of Directive 2014/95/EU and the Decree on the Publication of Non-Financial Information
Previous research focused on investigating the possible impact of the Directive requirements on companies in Member States (Černe et al., 2017; Venturelli et al., 2017; Matuszak & Różańska, 2017, Ogrean, 2017; Saenger, 2017). The previous mentioned studies focus on voluntary disclosure, since the studies are published in 2017, the Directive is effective from financial year 2017 and management reports of 2017 are published in 2018. The results show that there is still an important information gap that needs to be filled even among large entities. However, multi-national companies are the positive exception
The Dutch Authority for the Financial Markets (AFM) published a report where it reviews all the corporations that fall under the scope of the Decree to establish how they were implementing the Decree in their management reports for the financial year 2017, the AFM concludes in its report that the corporations in scope do not comply with the Decree in all aspects. According to the AFM: “The vast majority of companies report on their policy on the various aspects of non-financial information. The translation of policy into risks, KPIs and results falls short of the desired standard. Employee-related and environmental aspects receive the most attention, with human rights, anti-corruption and bribery receiving the least”.
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Disclosure can be defined as the communication of economic information, both financial and non-financial, relating to the financial position and performance of an organization (Wallace & Naser, 1995; Owusa-Ansah, 1998; Propova et al., 2013).
The reporting of the disclosure aspects can be mandatory or voluntary. Mandatory disclosure can be defined as information that must be disclosed to comply with certain regulations and legislations. The objective of mandatory disclosure is to increase transparency and thereby satisfying the users’ information needs, ensuring the production quality control through the legislation and standards observance. Voluntary disclosure relates to reporting information which is not obliged by legislations and standards, dependent both on the free choice of the management, f.e. because the organization believes that this disclosure will benefit the organization, and on the outside pressures of the capital markets (Wallace & Naser, 1995; Owusa-Ansah, 1998; Propova et al., 2013). In this investigation, the mandatory disclosure relates to Directive 2014/95/EU and the implementation in the Netherlands of the directive by introducing the Decree “Besluit bekendmaking niet-financiele informatie”. According to the Decree, management reports must include a number of elements: Environmental policy, results on the environmental policy, environmental risks and environmental KPIs. How these elements have to be presented is not stated in the Decree, Guidelines are given by the Global Reporting Initiative (GRI), UN Global Compact, ISO 26000, AccountAbility’s AA1000, OECD guidelines for multinational enterprises and can be considered as voluntary disclosure.
Historically, the principal aim of running a corporation was to maximize profitability. Although profitability is still a very important motive of running a corporation, nowadays the interest of stakeholders is considered as well. This causes many firms to adopt a triple bottom line philosophy, which states that organizational success is based on three dimensions of performance: (1) economic profitability, (2) environmental sustainability, and (3) social performance (Elkington, 1997; Hart and Milstein, 2003). The concept of disclosing information considering the interests, needs, norms and values of stakeholders like environmental sustainability and social performance, instead on just focusing on the interests of shareholders i.e. maximizing profitability, is known as the concept corporate social responsibility (CSR) reporting (Carrol, 1991; Frederick, 1994).
Stakeholder theory (Freeman, 1984; Jensen, 2001) emerged as the dominant theoretical response to the economists’ challenge about firms’ role as a wealth-creating agent or a social institution (Margolis and Walsh, 2003). Carrol (1991) states that “the relationship between CSR and stakeholder theory has been classified as “a natural fit”. Stakeholders are persons or groups that can affect or are affected by the corporations’ actions, objectives and policies (Freeman, 1984; Mitchell et all., 1997). The theory states that the corporation is a flexible, open system or cohesion of actors (i.e., stakeholders). These actors are motivated to participate in corporations’ activities and have various and sometimes converse interests (Basu & Palazzo, 2008; Freeman, 2005). Therefore, a corporation is required to balance different stakeholder interest in decisions and actions (Donaldson & Preston, 1995; Freeman, 2005). It can be stated that a corporations’ behavior reflects and can be forecasted by the nature of its diverse stakeholders, the norms and values that they adopt to define right or wrong, and their relative influence on organizational decisions. According to Aguilera et al. (2007), Matten and Crane (2005) Hillman and Keim (2001), Mohr et al (2001), Sen & Bhattacharya (2001), Logsdon and Wood (2002), Weaver et al. (1999) there exist increasing internal and external pressures from different stakeholder groups on corporations to fulfill broader social and environmental goals through embracing CSR practices. Firms face continuous antinomy of competing social and economic imperatives. In practice, the pressure leads to a rush of corporations’ initiatives to comply with this environmental standard (Matten and Moon, 2008; Margolis and Walsh 2003).
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theory states that corporations comply with certain standards when a standard is imposed (Deegan, 2002). This adjustment under pressure is also called institutional pressure. Examples of institutional pressure are pressure from politics, economics and society (Glover et al., 2014). Organizations will implement the adjustments in accordance with the standard in order to meet the expectations of institutional stakeholders to justify their behavior (Deegan, 2002).
Waddock and Graves (1997) refer to the good management theory, which states that managers recognize benefits gained by appearing to be socially responsible, even though the managers themselves may not be fully committed to or believe in the idea of CSR, they might pursue social performance goals anyway.
Furthermore, executives of financially successful firms might initiate CSR due to a sense of reciprocity and/or guilt (Margolis et al., 2007). Because of reciprocity, many successful individuals who run successful companies begin to assume they owe something to those around them (Frank, 2007). Guilt arises from distress over inequity. When people benefit more than others do, they feel unduly rewarded and this motivates efforts to help reduce those inequities (Baumeister et al., 1994). In this manner, guilt about reaping rewards without compensating others may propel firms‟ internal players to endeavor to do good deeds (Margolis et al., 2007).
From the study of Maignan and Ferrell (2004) it can be concluded that “CSR designates the duty, motivated by both instrumental and moral arguments, to meet or to exceed stakeholder norms dictating desirable corporations’ behaviors”. Beforementioned is in line with the resource dependence theory, which states that a corporation must meet the demands of those stakeholders that provide resources necessary and important for its continued survival (Frooman, 1999; Pfeffer, 1982).
As previous literature shows, before the implementation of the Decree, the Netherlands was already a high disclosure country (Gray, 1988; Vanstraelen et al. 2003) and stakeholders as well as entities already found social justice and environmental protection of paramount importance (Graafland et al. 2003). Therefore, the implementation of Directive 2014/95/EU as well as the Decree have raised a lot of critical opinions. The entry of the Decree seems outdated and the effectiveness of the Decree seems questionable (NBA, 2016; Kinderman, 2016; Matuszak & Różańska, 2017; AFM, 2018). Also in general, most studies focus on voluntary disclosure rather than mandatory disclosure (Omar & Simon, 2011). Healy & Palepu (2001) state that there is limited evidence about the consequences of mandatory disclosures and the evidence that is found does not paint a total picture. Therefore, the justification of mandatory disclosure is often complicated and there is no overarching theory that explains this phenomenon (Beyer et al. 2010). This thesis intends to investigate the effect of the implementation of the Decree on environmental disclosure in management reports of Dutch PIE’s by comparing the management reports of one year before and one year from effective date of the Decree.
It can be concluded that thus far environmental disclosure in the Netherlands was based on a voluntary basis and was not regulated by national laws. Despite the lack of such an obligation, companies used to make additional voluntary disclosures on non-financial information regarding CSR issues in different forms and extent, especially large, listed or public trust companies. Due to the fact that previous studies mostly focused on voluntary reporting, previous research on the Directive was only focused on the potential contribution of the Directive in Member States and there is a lack of studies focusing on mandatory disclosure, the focus of this thesis is to study the implementation of the Decree on environmental disclosure in management reports by comparing environmental disclosures in management reports the year before and the year of effectiveness of the Decree to identify if the implementation of the Decree leads to more environmental disclosure in management reports. With respect to the objective, this thesis tests the following hypothesis:
H1: The implementation of the Decree does not lead to significant changes on environmental disclosure in management reports of Dutch listed corporations.
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The above hypothesis could be further sub-divided into the following sub-hypothesis:
H1a: The implementation of the Decree in the Netherlands does not lead to significant changes in disclosure on results of the environmental policy
H1b: The implementation of the Decree in the Netherlands does not lead to significant changes in disclosure on environmental risks
H1c: The implementation of the Decree in the Netherlands does not lead to significant changes in disclosure on environmental KPIs
IV. RESEARCH METHODOLOGY
Sample and Data
The initial sample consisted of entities that are listed on the Amsterdam Exchange Index (AEX) between 2016 and 2017. The motivation for this sample is twofold. First, the Decree is only applicable to entities that are listed on the AEX market. Second, the sampling period starts the year before the Decree is implemented and ends the first year the law is effective. This time period gives the opportunity to test if there is a difference in environmental disclosure before and after the effective date of the law.
I obtained relevant financial and non-financial information of all Dutch AEX listed companies from management reports stored on company.info. Initially, the sample consisted of 292 firm-year observations. Next, several exclusionary criteria were applied to this initial dataset to obtain the final sample. The Decree is only applicable to large PIEs. In chapter 2.1.4 I stated the requirements in the law when a PIE is considered large. Therefore, I first excluded PIEs which were not listed on the AEX market in both years, second I excluded entities with an average number of <500 employees in one or both financial years and third I excluded PIEs with a balance sheet value <20 million and net sales <40 million in one or both financial years. Lastly, I excluded all financial services, insurance and utility entities, because they have significant different corporate structures and an unique regulatory and reporting environment (Chen et al., 2014; Duellman et al., 2015, Venturelli et al., 2017). For example, a recent study of Venturelli et al. (2017) shows that in the management reports of 2015, the financial sector already scored significant higher on reporting on environmental risks and environmental performance than the non-financial sector due to the greater risk culture in the financial services industry which influences the reporting environment. These criteria yield a final sample of 108 firm-year observations, representing 54 unique Dutch listed entities over the years 2016 and 2017.
Variable Measures
Dependent Variables: Disclosure on environmental policy (DISC_EP), disclosure on results of the environmental policy (DISC_REP), disclosure on environmental risks (DISC_ER) and disclosure on environmental KPIs (DISC_EKPI). To analyze the extent of compliance with the Decree I used data gathered from management reports, which mostly can be obtained from the websites of the entities or the website company.info. The data are scored on a number of disclosure items in the disclosure index, which are established from the requirements stated in the Decree. The items are similar as the requirements mentioned in 2.1.4., therefore the disclosure index contain as followed: The policy in relation to the environment; the results of the policy in relation to the environment; the main risks and control of these risks in relation to the environment and non-financial performance indicators in relation to the environment. Every item received a score of 1 if the entity complied with the disclosure requirement or explained why they did not disclosed the item, the item received a score of 0 when they
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did not comply to the disclosure requirement and did not explain why they did not disclose. In total, all reports can achieve a minimum score of 0 and a maximum score of 4. A minimum score of 0 means that the entity does not comply with the requirements stated in the Decree at all, a maximum score of 4 means the company discloses all required information stated in the Decree.
Independent Variables As can be seen in table 1 below, the independent variables are divided into two groups: explanatory variables and control variables. The explanatory variable in this thesis is the year the management report is published (POST).
Control Variables: Firm size, profitability, leverage and industry. Following prior literature, I controlled for a set of firm-specific characteristics that could influence the disclosure of environmental reporting in management reports.
I control for firm size (F_SIZE), as Gallo and Christensen (2011) and Clarkson et al. (2008) found evidence that firm size is strongly related with the reporting of environmental disclosure. A first explanation of this is that large companies are more likely to be under public control and therefore report more on environmental aspects (Liu and Anbumozhi, 2009). A second explanation is that larger companies have superior resources, which means they make better efforts in the area of environmental reporting (Cormier et al., 2005, Liu and Anbumozhi, 2009). Therefore, I expect that the positive effect of firm size on the environmental reporting has to be corrected. Therefore, organization size is defined as the natural log value of the total assets and this will be measured by means of a log transformation. Moreover, this study controls for profitability (PROFITABILITY) by calculating the return on assets. there are several studies which have found evidence that profitability is positive related to the extent of disclosure (Gray et al., 2001; Owusu-Ansah, 1988).
Additionally, this study controls for leverage (LEVERAGE), as previous studies have found evidence that a high leverage is positively related to the extent of disclosure (Meyers, 1977; Schipper 1981; Wallace 1994; Jensen and Meckling 1976).
The data on firm size, profitability and leverage are derived from the annual reports. Firm size is measured as the logarithm of the total assets per year end, profitability is measured as net income over total assets and leverage is measured as total debt over total assets.
Industry indicators are included in all models to account for the influence of the industry. TABLE 1
Measurement of dependent and independent variables
Variable Description Database
Dependend variables
DISC_EP 0 for non-compliance, 1 for compliance Annual reports DISC REP 0 for non-compliance, 1 for compliance Annual reports DISC ER 0 for non-compliance, 1 for compliance Annual reports DISC_EKPI 0 for non-compliance, 1 for compliance Annual reports
Independent variables
Explanatory variable
12 Control variables
PROFITABILITY Net income divided by total assets. Annual reports F_SIZE The logarithm of total assets per year end. Annual reports
LEVERAGE
The sum of debt in current and long-term
liabilities divided by total assets. Annual reports
Emperical Model
Prior to performing the regressions, data is adjusted. First, for the employment of the statistical model a dummy variable was created for the explanatory variable POST. A score of 1 is given is the management report is considers financial year 2017, a score of 0 is given if a the management report considers financial year 2016. Second, the control variable firm size (F_SIZE) is standardized by deriving the natural logarithm (LN) from the value of the total assets.
Ordinary Least Squares (OLS) regression models are employed to examine the relationship between the implementation of the Decree and the environmental disclosure in the management reports. The following models are estimated:
DISC REP = 𝛽𝛽0 + 𝛽𝛽1POST + 𝛽𝛽2PROF + 𝛽𝛽3 F_SIZE + 𝛽𝛽4 LEVERAGE + 𝜀𝜀 DISC ER = 𝛽𝛽0 + 𝛽𝛽1POST + 𝛽𝛽2PROF + 𝛽𝛽3 F_SIZE + 𝛽𝛽4 LEVERAGE + 𝜀𝜀 DISC EKPI = 𝛽𝛽0 + 𝛽𝛽1POST + 𝛽𝛽2PROF + 𝛽𝛽3 F_SIZE + 𝛽𝛽4 LEVERAGE + 𝜀𝜀
Because of the use of panel data, heteroscedasticity can occur, which entails that errors are not independent and identically distributed. This possible bias can influence the reliability of hypothesis testing. Robust standard errors are applied in the regression model to account for heteroscedasticity, (Baboukardor & Rimmel, 2016; Breusch & Pagan, 1979). The variables are described in Appendix A.
V. RESULTS
Descriptive Statistics
Table 2 presents descriptive statistics for all variables used in the main empirical tests for both years, the year 2016 and the year 2017. The descriptive findings of the variables over a two-year period by a sample of 108 firm-year observations show that disclosure on results environmental policy (DISC REP), disclosure on environmental risks (DISC ER) and disclosure on environmental KPIs (DISC EKPI) score 0.7870, 0.6822 and 0.8056 respectively. This means that on average, Dutch listed PIEs complies for 79% with the requirement of the Decree to disclose on results on environmental policy, for 68% with the requirement of the Decree to disclose on environmental risks and for 81% to disclosure on environmental KPIs. The state the impact of the implementation, the averages of both years 2016 and 2017 are separate presented in the table. In 2016 disclosure on results on the environmental policy (DISC REP) scored 70%, in 2017 this score is 87%, indicating disclosure in 2017 increased is significantly. This is also applies to disclosure on environmental risks (DISC ER) and disclosure on environmental KPIs (DISC EKPI) with respectively a score of 65% and 74% disclosure in 2016 and a 72% and 87% disclosure in
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2017. In addition to this, the standard deviations in 2016 were higher than in 2017, which means the variation in compliance with the Decree across the Dutch listed PIEs decreased.
Table 3 presents the Pearson correlation matrix, which shows whether there is a correlating relationship between disclosure on results environmental policy, disclosure on environmental risks, disclosures on environmental KPIs, POST and the control variables (without fixed affects). The results shows statistical significance correlations at the 0.01 level between all dependent variables. Also POST is found to be positively correlated with disclosure on results environmental policy (DISC REP) ( B = 0.035 , P < 0.01). Hypothesis 1a predicted no significant changes in disclosure in the management reports, the correlation matrix shows that in contrary to the prediction, there is a positive relationship. This also applies to hypothesis 1c. Also a significant positive relationship between disclosures on environmental risks (DISC ER) is found on firm size (F_SIZE) as well as leverage (LEVARAGE), indicating the higher the firm size and leverage, the higher the disclosure on environmental risks. No significant correlating relationship is found between POST and disclosure on environmental risks (DISC ER). The results show no multicollinearity between measurements of variables.
TABLE 2
DESCRIPTIVE STATISTICS BOTH YEARS (2016 AND 2017)
Dependent variables N Minimum Maximum Mean Std.
Deviation DISC REP 108 0 1 0.7870 0.4113 DISC ER 108 0 1 0.6822 0.4678 DISC EKPI 108 0 1 0.8056 0.3976 Independent variable Explanatory variables POST 108 0 1 0.5 0 Control variables PROF* 108 78.5 263.000 14.100 37.900 F_SIZE 108 -0.1487 0.6112 0.0531 0.0891 LEVERAGE 108 0.17 1.029 1.15 9.98
DESCRIPTIVE STATISTICS YEAR 1 (2016)
Dependent variables N Minimum Maximum Mean Std.
Deviation DISC REP 54 0 1 0.7037 0.4609 DISC ER 54 0 1 0.6481 0.4820 DISC EKPI 54 0 1 0.7407 0.4423 Independent variable Explanatory variables POST 54 0 1 0.5 0 Control variables PROFITABILITY* 54 78.5 262.000 14.100 38.100 F_SIZE 54 -0.1384 0.6112 0.0538 0.0958 LEVERAGE 54 0.17 1.029 0.5495 0.1925
14
DESCRIPTIVE STATISTICS YEAR 2 (2017)
Dependent variables N Minimum Maximum Mean Std.
Deviation DISC REP 54 0 1 0.8704 0.3390 DISC ER 54 0 1 0.7170 0.4548 DISC EKPI 54 0 1 0.8704 0.3390 Independent variable Explanatory variables POST 54 0 1 0.5 0 Control variables PROFITABILITY* 54 85.5 263.000 14.100 38.000 F_SIZE 54 -0.1487 0.3769 0.0523 0.0826 LEVERAGE 54 0.17 1.01 3.92 1.92 * In millions TABLE 3
PEARSON CORRELATION MATRIX
Variables a 1 2 3 4 5 6 7 DISC REP 1 DISC ER 0.3758*** 1 DISC EKPI 0.4873*** 0.3198*** 1 POST 0.2035** 0.0739 0.1638* 1 F_SIZE 0.1440 0.2050** 0.1391 -0.0009 1 PROFITABILITY 0.0825 0.0783 -0.0295 -0.0087 -0.0130 1 LEVERAGE 0.2012** 0.3221*** 0.1304 0.0223 0.3011*** -0.2426** 1
*, **, *** Denote two-tailed statistical significance at the 0.10, 0.5 and 0.01 levels, respectively. a All variables are defined in Appendix A
Test Results
The effect of the implementation of the Decree on Environmental Disclosure in Management Reports of Dutch listed companies. Table 3 states the results on the effect of the implementation of the Decree on environmental disclosure in management reports of Dutch listed companies estimated with the ordinary least squares method and with the fixed effects method.
Hypothesis 1A – Disclosure on Results of Environmental Policy
Hypothesis 1a predicts no significant changes between the implementation of the Decree and disclosure on results environmental policy. This hypothesis is tested in table 4. The results show there is a strong significant positive relationship between the explanatory variable post and the disclosure on results of environmental policy (β= 1,782, P < 0,01). Therefore, hypotheses 1a is not supported, meaning that management reports in 2017 have significant higher disclosure on results of environmental policy compared to management reports in 2016. The adjusted R-squared is 0.1952. This means that 19,52% of the variation on disclosure on results of environmental policy can be explained by the variation in the control variables and the post variable.
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Hypothesis 1B – Disclosure on Environmental Risks
Hypothesis 1a predicts no significant changes between the implementation of the Decree and disclosure on environmental risks. This hypothesis is tested in table 4. The results show there is a positive relationship between the variables, however non-significant (β= 0.0576, P > 0,1). Therefore hypotheses 1B is supported, meaning that Dutch listed PIEs in the Netherlands did not significantly increase disclosure on environmental risks with the implementation of the Decree. The adjusted R-squared is 0.2610. This means that 26,1% of the variation in environmental risk disclosure can be explained by the variation in control variables and the post variable.
Hypothesis 1C – Disclosure on Environmental KPIs
Hypothesis 1a predicts no significant changes between the implementation of the Decree and
disclosure on environmental KPIs. This hypothesis is tested in table 4. The results show there is a significant positive relationship between the variables (β= 0.1276, P > 0,1). Therefore, hypotheses 1c is not supported, meaning that the management reports in 2017 have significant higher disclosure on environmental KPI’s. The adjusted R-squared is 0.1034. This means that 10,34% of the variation in disclosure on environmental KPIs can be explained by the variation in control variables and the post variable.
16 TABLE 4
The effect of the implementation of the decree “Besluit niet-financiele informatie” on the environmental disclosure in management reports of Dutch listed companies
OLS method FE method
Disclosure results policy Disclosure risks Disclosure KPI Disclosure results policy Disclosure risks Disclosure KPI
Coefficient Coefficient Coefficient Coefficient Coefficient Coefficient
Variables a (Std. Err.)b (Std. Err.)b (Std. Err.)b (Std. Err.)b (Std. Err.)b (Std. Err.)b
Post 0.1625 0.0497 0.1274 *** 0.1782 *** 0.0576 0.1276 *** (0.0749) (0.0825) (0.0764) (0.0543) (0.0530) (0.0458) ln_firmsize 0.0398 0.0455 ** 0.0345 *** -0.0761 -0.7878 0.5485 (0.0197) (0.0203) (0.0201) (0.5161) (0.5417) (0.5138) profitability 0.5035 0.4194 -0.1746 -0.1293 0.1206 0.0113 (0.2757) (0.4456) (0.6200) (0.4468) (0.3403) (0.2827) leverage 0.5331 0.7024 *** 0.1829 -1.2271 * 1.0094 -0.6117 (0.2333) (0.2530) (0.2287) (0.7143) (0.9241) (0.6575) constant -0.3378 -0.7701 * -0.0594 30.520 17.0567 -10.7392 (0.4132) (0.4296) (0.4425) -108.891 (11.452) (10.7846) observations 108 108 108 108 108 108 industry fixed
effects Yes Yes Yes Yes Yes Yes
R-squared 0.1952 0.261 0.1034 0.1952 0.2610 0.1034
*, **, *** Denote two-tailed statistical significance at the 0.10, 0.05 and 0.01 levels, respectively. a All variables are defined in Appendix A
b Robust standard errors are shown in parentheses.
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VI. CONCLUDING DISCUSSION
As before mentioned, previous literature shows that in the Netherlands, stakeholders as well as public listed firms find social justice and environmental protection of paramount importance which results in the Netherlands being a high disclosure country concerning Corporate Social Responsibility (CSR). Therefore, it is predicted that the implementation of the Decree will not lead to significant changes in the environmental disclosure in management reports. The implementation of Directive 2014/95/EU as well as the Decree have raised several concerns: the entry of the Decree could be deemed outdated and its effectiveness might be questionable. In addition to before mentioned, it is predicted that due to overregulation, the implementation of the Decree could be a wastage of public money, as regulations are costly in terms of parliamentary time.
The goal of this study was twofold. First, this study set out to analyze the stated requirements in the Directive and to extend the research on Directive 2014/95/EU and the implementation of the Decree in the Netherlands. Second this study aimed to evaluate whether the Decree influences the environmental disclosure in management reports. As such the research question was as follows: “What is the effect of the implementation of the Decree on the publication of non-financial information on environmental disclosure in management reports of Dutch listed firms?”. In addition, this study illustrates how multiple factors like firm size, profitability, leverage and industry can influence the association between mandatory reporting and disclosures. The findings of this study are based on a sample of 108 firm-year observations, representing 54 unique Dutch listed entities over the years 2016 and 2017. The main hypothesis tested is: “The implementation of the Decree does not lead to significant changes on environmental disclosure in management reports of Dutch listed corporations”. To test the hypothesis, the main hypothesis is divided into 3 sub-hypothesis. Several panel data regression models with fixed effects are used to test the sub-hypotheses.
The first sub-hypothesis focuses on the causal relationship between the implementation of the Decree and environmental disclosure on results of the environmental policy. The results show a significant positive relationship between the implementation of the Decree and environmental disclosure on results of the environmental policy. Therefore, I find no support for hypothesis 1a.
The second sub-hypothesis focuses on the causal relationship between the implementation of the Decree and the environmental disclosure on risks. The results show a positive relationship, hence not significant. Therefore I find support for hypothesis 1b.
The third sub-hypothesis focuses on the causal relationship between the implementation of the Decree and the disclosure on environmental KPIs. The results show a significant positive relationship between the implementation of the Decree and disclosure on environmental KPIs, therefore I find no support for hypothesis 1c.
The stated research question can be answered by the fact that a significant positive relationship between the implementation of the Decree and environmental disclosure in management reports is found. A side note is that this study finds that, in line with previous research of the AFM (In Balance 2018, AFM) it can be concluded that the Dutch listed corporations in the sample have not prepared the management report in full accordance with the Decree. This outcome does not differ from previous researches which focused on the compliance with the Directive before the Directive was implemented (Černe et al., 2017; Venturelli et al., 2017; Matuszak & Różańska, 2017, Ogrean, 2017; Saenger, 2017).
The main theoretical implication of this thesis is that it provides insights into the effectiveness of the Decree related to environmental disclosure in management reports. As previous studies focused on the relationship between Directive 2014/95/EU and disclosure in management reports before the Directive was officially effective, which means disclosures were performed on voluntary bases (Černe et al., 2017; Venturelli et al., 2017; Matuszak & Różańska, 2017) this study is the first considering the
18
effect of the Decree on the environmental disclosure in management reports after the effective date of the Decree. Therefore, the findings of this study provide evidence that tries to understand the relationship between the Decree and environmental disclosure, and even on a higher level on the degree whether laws are associated with the extent of disclosure.
This thesis adds to the growing literature of the influence of legislation on disclosure in general. I add to this literature by presenting results on the specific effect of a new legislation on environmental disclosure on management reports.
The practical relevance of this thesis is that research on the impact of legislation on environmental disclosure is informative to regulators and standard setters to further extent the requirements in the Directive and the Decree, as mandatory regulations on environmental disclosure seems to increase the extent of disclosure in management reports. Moreover, this research could be useful to boards of directors by comparing their own compliance on the Decree in relation to the other Dutch listed entities which are applicable to the Decree. Additionally, these findings are relevant to investors and other users of management reports in evaluating the environmental disclosure in management reports.
I acknowledge that this study has several limitations. First, I left the financial service, insurance and utility corporations out of scope. Future studies should investigate the impact of the implementation of the Decree on environmental disclosure in management reports in financial service, insurance and utility entities in the Netherlands and on the other hand determine the qualitative differences in terms of environmental information disclosure between the Netherlands and other Member states that have transposed Directive EU/2014/95 into their foreign law.
In extent to before mentioned, future studies should focus not only on the environmental aspects of Directive EU/2014/95 but on all the aspects mentioned in the law. In addition to this, when in the future more studies have been performed on the influence of the national laws based on Directive EU/2014/95 and the disclosure in management reports, the national laws and the disclosures can be compared to find relationships between differences in regulations and differences in disclosure, to test which kind of regulation does effect disclosure the most.
Another limitation is that recent research of Ioannou and Serafeim (2017) shows that even in the absence of a regulation that mandates the adoption of assurance or specific guidelines, firms seek the qualitative properties of comparability and credibility. In the last five years the percentage of corporations releasing environmental information has grown from 20% to 80%, this phenomenon manifests globally. Because beforementioned, it can be argued that besides the effect of the implementation of the Decree, other effects need to be considered which result in an increase in environmental disclosure.
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Regulations
Directive 2014/95/EU
Article 2:391 paragraph 5 Civil Code
Wet Toezicht Accountantsorganisaties (WTA)
Besluit bekendmaking niet-financiële informatie, 2017 Besluit aanwijzing organisaties van openbaar belang, 2018
