January 21, 2019
UNIVERSITY OF GRONINGEN
Faculty of Economics and Business - MSc. Strategic innovation Management
Ownership Effects on Corporate Brownwash;
To green or not to green?
Author:
Jochem Lubsen - s2499053
Supervisors:
prof. dr. J. Surroca (1
st),
prof. dr. P. M. M. de Faria (2
nd)
Abstract
Environmental reporting, which embodies a firm’s efforts to (adequately) communicate its environmental efforts, it a necessity in today’s competitive markets. Though, the quality of these reports is more than often subject to debate. As corporate greenwash behaviour has deteriorated environmental reporting, an extent of scholars have fixated on greenwash, while neglecting an equally interesting deceptive environmental strategy; corporate brownwash. Drawing on theories on organizational decoupling, I contribute to theory on sustainable governance by studying an unexplored field of ownership and environmental reporting. Specifically, I pose that pressure-sensitive investors (banks & insurance companies and minority investors) have a positive impact on corporate brownwash, such that management is more likely to underreport its environmental efforts. Alternatively, that pressure-resistant investors (pension funds and foundations) negatively affect brownwash. Data on 694 European publicly stock-listed firms shows that ownership structure is indeed an influential factor for environmental reporting, as I provide evidence for the existence of a topic of recent academic interest; corporate brownwash. Accordingly, this study contributes to the debate on whether it “pays to be green”, while it carries more understanding on how investors and managers impact a firm’s environmental strategy.
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ACKNOWLEDGEMENTS
This master thesis will be my finishing work for my master’s degree in Strategic Innovation Management. In these acknowledgements I would like to thank everyone who helped me in the completion of this task.
First, I would like to thank my supervisor prof. dr. Jordi Surroca who has provided me with good insights and guidance during my master thesis trajectory. Furthermore, I would like to thank all SIM professors, lecturers and coordinators who prepared me not only for the writing of my thesis, but also for my future career. Also, I would like to thank my fellow students with whom I could share my thoughts and troubles during the writing of the review, data collection and analysis.
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CONTENTS
Abstract
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Acknowledgements
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Introduction
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Theory & Hypothesis
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Strategies for Environmental Reporting Managerial Incentives for CSR Organizational Decoupling Ownership Effects on Corporate Brownwash
Research Design
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Data Collection and Sample Measures Empirical Strategy
Results
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Descriptive Statistics Main Regression Results Auxiliary Regression Results
Discussion
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Theoretical Implications Practical Implications Limitations & Future Research Directions
Conclusion
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Appendices
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INTRODUCTION
In the new millennium firms have increasingly become subject to scrutiny on environmental performance from both in- and external stakeholders (Marquis, Toffel & Zhou, 2016). Consumers have become more aware of their environmental footprint and devote their money and loyalty to the companies that operate in more sustainable ways (Lii & Lee, 2011; Martinez & Rodriguez, 2013), whereas governments and NGO’s push for environmental legislation and green certification programmes (Fuerst & McAllister, 2010). Consequently, firms have progressively focused on environmental reporting (Blasco & King, 2017). Yet, despite these societal and economic pressures, there are still firms that deliberately choose not to report how their company is doing in terms of environmental performance; otherwise known as silent green firms (Delmas & Burbano, 2011). Kim and Lyon (2015) characterized these firms as engaged in “brownwash”, in contrast to its more infamous counterpart greenwash. Though if in the new millennium, “it pays to be green” (Porter & van der Linde, 1995; Hart & Ahuja, 1996; Heal, 2005; Hargreaves, 2012), why do firms engage in such misleading disclosure strategies, thus, choosing to deliberately withhold positive information regarding their social and environmental performance?
Kim and Lyon (2015) found that increased shareholder salience, as a result of pressures to be profitable could increase corporate brownwash. The rationale here is that investors can respond negatively to environmental, social and governance (ESG) activities (Jacobs, Singhal & Subramanian, 2010; Lyon et al., 2013), as shareholders assume ESG ventures are at the expense of the most efficient allocation of resources (Friedman, 1970; Ullmann, 1985). Over the years, various other scholars have contradicted the notion that “it pays to be green” and argued that corporate social responsibility (CSR) strategies, understood as "Actions of firms that
contribute to social welfare, beyond what is required for profit maximization" (McWilliams, 2015, p. 1), more
than often resulted in costly and unprofitable outcomes (Aldy & Stavins, 2012). Even more so, most governments, excluding US president Donald Trump, and NGO’s operate from the reasoning that regulations are a necessity for stimulating environmental change (Palmer, Oates & Portney, 1995). Simultaneously, growing societal pressures to be green, have incentivized firms to exaggerate CSR performance, commonly referred to as greenwash (Delmas & Burbano, 2011). Consequently, misleading green claims (product-level) and selective disclosure of environmental information (corporate-level) have risen to “epidemic proportions” (Hsu, 2011). At the same time, consumers and investors, as well as academics, have become aware of the greenwash phenomenon, and a body of literature emerged (Kolk, 2004; Ramus & Montiel, 2005; Delmas & Burbano 2011; Kim & Lyon, 2011; Lyon & Maxwell, 2011; Lyon & Montgomery, 2013; Bowen & Arragon-Correa 2014; Marquis, Toffel & Zhou, 2016). Though, as we have begun to understand what drives greenwashing behaviour, little do we know as to why firms choose to understate their environmental performance. More bluntly, why, when and how do firms brownwash?
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facing diverging stakeholder pressures and opposing interests as to their investors and owners, may use information asymmetries to guard themselves from conflict. Consequently, in environmental reporting, firms may opt to mislead investors by decoupling internal actions from external communications, deteriorating environmental reporting quality (Rao, Tilt & Lester, 2012; Amran, Lee & Devi, 2013). In the case of corporate brownwash, firms may face both internal (e.g. corporate morale) and external (competitiveness and legitimacy) pressures to pursue CSR (Bansal & Roth, 2000), while facing shareholder pressures for short-term profit maximization (Kim & Lyon, 2015). Concurrently, firm management can be incentivized to underreport ESG performance.
Accordingly, multiple scholars have researched how investors and governance characteristics impact firm CSR performance (Godfrey, Merrill & Hanssen, 2009; Harjoto & Jo, 2011; Dam & Scholtens, 2012). Yet, results have been inconsistent and inconclusive (Walls & Berrone, 2012). Zahra, Neubaum and Huse (2000) explain that these inconsistencies may arise as investors are heterogeneous, while varying types of investors each have distinct goals and desires, and different stakeholders to account for. Therefore, investor interests can either converge or diverge from the goals of corporate management, which could in theory, impact the extent to which firms pursue corporate brownwash. However, little empirical work has tested how governance effects translated into environmental reporting. Moreover, the effects that shareholders have on corporate brownwash remain ambiguous and current literature fails to explain how different governance structures impact a firm’s decision to withhold positive environmental information. Altogether, corporate brownwash is a topic of only recent academic interest and Kim and Lyon (2015) stretch the urgent need for additional research on this intriguing phenomenon. Accordingly, this study aims to research this unexplored of sustainable governance, with a particular focus on corporate brownwash.
Therefore the research question of this study reads:
“How does firm ownership structure influence corporate brownwash?”
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THEORY & HYPOTHESES
To start off, this paper will level the playing field by discussing (1) environmental reporting in context of misleading communication strategies. Subsequently, (2) management’ incentives for CSR are debated followed by (3) mechanisms for - and theories on organizational decoupling. Finally, (4) I propose and contemplate effects for distinct types of ownership on corporate brownwash.
Strategies for Environmental Reporting
As societal and economic pressures for firms to behave responsibly increased, a global trend has emerged where firms focus more on environmental reporting (Blasco & King, 2017). Relatively new terms such as CSR and creating shared value (CSV), "the policies and operating practices that enhance the competitiveness of a
company while simultaneously advancing the economic and social conditions in the communities in which it operates" (Porter & Kramer, 2011, p. 68), have created opportunities for companies to display their
environmental achievements to consumers and investors. According to Holland and Foo (2003) however, there is a lack of regulations in environmental reporting, resulting in varying environmental disclosure standards and firms remaining relatively free in choosing what they do and what they do not communicate. Consequently, agency problems can arise (Fama & Jensen, 1983), demonstrated by information asymmetries between management and its stakeholders, allowing firms to pursue strategies such as green – and brownwash. Over the years several institutes have attempted to improve the quality of environmental reports. The Global Reporting Initiative (GRI) classified sustainable reporting into three categories (economic, environmental and social) and Morgan Stanley Capital International (MSCI) evaluated and scored firms based on their ESG activities. Such initiatives have significantly improved transparency in environmental reporting (Blasco & King, 2017). However, in order to develop a full grained understanding of why firms engage in misleading communication in the first place, we need to comprehend the trade-offs, pressures and decisions that firms face in formulating their environmental reporting strategy.
Delmas and Burbano (2011) typified firms based on their environmental performance and environmental communications. In their results, four types of firms emerged; (1) vocal brown firms, (2) vocal green firms, (3) silent brown firms and (4) silent green firms. In this instance, vocal brown firms symbolise businesses that exaggerate ESG practices, i.e. greenwash. Vocal green firms and silent brown firms have coherent ESG communications and – practices, whereas silent green firms understate their environmental efforts, later characterized as “brownwash” (Kim & Lyon, 2015). Concurrently, an extent of societal interest and academic work has been fixated on greenwash (Kolk, 2004; Ramus & Montiel, 2005; Kim & Lyon, 2011; Bowen & Arragon-Correa 2014). Lyon and Maxwell (2011) characterized corporate greenwash as: “The selective
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and circumstances under which greenwash is more likely to occur, research has neglected a distinct and equally interesting strategy in environmental reporting; corporate brownwash.
Corporate brownwash to date
Importantly, there is a distinction between product-level – and firm-level (corporate) brownwash, as motives for product-level brownwash, e.g. price premia and reversed signalling (Bonini & Oppenheim, 2008; Delmas and Grant, 2014; Newman, Gorlin & Dhar, 2014), might differ significantly from firm-level motivations to brownwash. This study entails a corporate focus, on the reporting level. As indicated, brownwash has only more recently become a topic of academic interest, while only few scholars have attempted to explain and empirically validate the phenomenon. Kim and Lyon (2015) found that firms in deregulated environments are more likely to brownwash, and subsequently, that low profits positively moderate this effect. The rationale for this relationship concerns the notion that shareholders can respond negatively to a firm’s ESG actions (Jacobs et al. 2010; Fisher-Van den & Thorburn, 2011; Lyon et al., 2013), while shareholders make the assumption that expenditure on social and environmental activities can be costly and is not the most efficient allocation of resources; it does not result in maximized shareholder value. Consequently, in deregulated environments where shareholders become the most dominant stakeholder, firms might deliberately understate their (costly) ESG activities out of fear for shareholder repercussions. Concurrently, when firms face difficulties in generating profits, shareholder interests tend to become even more dominant. Subsequently, Testa et al. (2018) tested how firm brownwash affected corporate financial performance (CFP). In line with Kim and Lyon (2015) they argued and identified that firms adopting a brownwashing strategy were associated with lower CFP. To date, few other effects on brownwash have been empirically tested, moreover the process and mechanisms by which shareholders drive management to pursue corporate brownwash remain unclear and ambiguous in their implications. However, literature has pointed out some interesting directions.
Aside the need for additional research on stakeholder’ pressures and their effects on corporate brownwash, Kim and Lyon (2015) touch upon the relationship between management and its investors. They argue that corporate brownwash is a more attractive strategy for management when investor’ and managerial’ interests conflict. In specific, this tension rises when management has motivations to pursue substantive ESG action, while investor interests run counter to CSR. Existing research however, has shown that investor preferences for CSR differ in relation to various ownership structures (Neubaum & Zahra, 2006; Dam & Scholtens, 2012; Walls & Berrone, 2012). Though, before I discuss this array of investor preferences, it is paramount to understand why and in which instance firm management is motivated to pursue substantive environmental action.
Managerial Incentives for CSR
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(1) Competitiveness regards managements’ efforts to maximize their utility. The mean is creating a competitive advantage to the ends of higher profitability and market differentiation. Porter and van der Linde (1995) argued that not only can reducing environmental impact minimize input - and waste disposal costs, it can also foster innovation and a firm’s competitive position in the market. Likewise, Chang (2011) found that firms can gain sustainable advantage through green innovation. Accordingly, the term “Creating Shared Value” (Porter & Kramer, 2011), embodies a situation where both the firm and society benefit. Multiple scholars have backed up that management can have economic incentives to pursue ESG activities. Heal (2005) finds that CSR programmes can improve corporate profits and Miroshnychenko, Barontini and Testa (2017) show on a global basis, that firms who adopt green practices enhance their financial performance. Altogether, providing a solid premise for management to pursue substantive environmental action. (2) Legitimation can be traced back to institutional and stakeholder theory (DiMaggio & Powell, 1983; Aldrich & Fiol, 1994; Scott, 1995; Freeman et al., 2010) where organizations are expected to comply with institutional (e.g. legislators, industry members, investors) and stakeholder (e.g. customers, employees, shareholders) pressures. Accordingly, management will seek to conform to environmental regulations and societal norms to ensure the long-term survival of the firm. It also regards building a reputation and brand management (Martinez & Rodriguez, 2013), if not the avoidance of environmental scandals (Marquis, Toffel & Zhou, 2016). In this manner, management may seek substantive actions as a form of risk management. Fortunately, (3) a sense of ecological responsibility can motivate companies to go green. Ethically motivated top management can promote philanthropy through leadership as it is the “right thing to do” (Wood, 1991). Consequently, sustainable leadership has the potential to change businesses for the better (Hargreaves, 2012) as it can improve learning, entrepreneurship (Zahra, Neubaum & Huse, 2000), and employee - and individual satisfaction (Bansal & Roth, 2000). Accordingly, firm management may opt to go green for individual values and to improve the corporate morale as a whole.
Altogether literature has pointed out a variety of motivations for firm management to pursue substantive environmental action. So if in these instances is does “pay to be green”, why and when does management feel the need to hide their environmental activities? The following section aims to explain the process by which firms decouple internal actions from external communications.
Organizational Decoupling
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neo-institutional theory, which have often been used to attempt to explain difficulties between firm owners and management.
Agency and Institutional Pressures
A widely debated theory in organizational behaviour literature has been agency theory. Not only because of its importance, but also due to its controversy (Eisenhardt, 1989). Agency theory originates from the 1970s (Ross, 1973; Jensen & Meckling, 1976) where it is used to explain behavioural elements of different firm parties trying to maximize their utility. According to Eisenhardt (1989) there are two problems that can arise agency relationships, respectively (1) conflicting goals and desires and (2) the principal’s costs to verify information provided by the agents.
As discussed, management can be motivated to pursue substantive environmental action, either be it for long-term competitiveness (Porter & Kramer, 2011), legitimacy and reputational purposes (Lii & Lee, 2013) or sustainable leadership (Hargreaves, 2012). However, in multiple instances scholars have also contradicted the notion that “it pays to be green” (Palmer, Oates & Portney, 1995; King & Lenox, 2001; Aldy & Stavins, 2012). Kim & Lyon (2015) show that the contradictory findings in this debate can give rise to a tension between various stakeholders of the firm, most prominent, between firm management and its shareholders. While shareholders have shown to respond negatively to environmental performance (Jacobs et al., 2010; Lyon et al., 2013), as they demand short-term results and effective allocation of resources (Ullmann, 1985; Kim & Lyon, 2015). Accordingly, agency relationships arise, where (1) investors and management have conflicting interests in CSR and (2) management has an information advantage as opposed to its shareholders.
Neo-institutional theorists (King, Lenox & Terlaak, 2005; Berrone & Gomez Mejia, 2009-1) argue that firms distinguish between two types of actions; (1) internally focused actions and (2) externally focussed actions, each addressing specific stakeholder groups (Freeman et al., 2010). In the case of corporate brownwash, management feels pressures to pursue sustainable long-term activities, while simultaneously experiencing pressures from investors to deliver short-term results and make effective allocations of resources. Consequently, these tensions between investors and management, come to light in environmental reporting, where firms decouple internal practice from external communications (Kim & Lyon, 2015). While a lack of regulation (Holland & Foo, 2003) allows firms to remain free in deciding what they do and do not report, limiting the investors’ capability to verify information provided by the firm. Should these pressures increase, and interests between investors and management diverge, management may feel the need to decouple present and future environmental practices from communications in corporate reporting (see Figure 1), characterized here, as corporate brownwash.
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FIGURE 1: The effect institutional pressures and agency problems on corporate brownwash
Ownership Effects on Corporate Brownwash
Governance structures have long been a topic of interest in both the fields of CSR as well as corporate reporting and accounting. This paper aims to connect both fields. Several scholars concluded that certain ownership types are more inclined towards CSR investments (Zahra, Neubaum & Huse, 2000; Dam & Scholtens, 2012). From an agency perspective, Fama and Jensen (1983) found that particular governance characteristics could reduce agency problems in corporate reporting. This paper identifies three distinct ownership structures that could impact corporate brownwash. Specifically (1) pressure-sensitive institutional ownership, (2) pressure-resistant institutional ownership and (3) minority ownership.
Institutional ownership
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firm’s likelihood to engage in corporate brownwash. The rationale behind this notion is twofold; (1) institutional owners have different stakeholders to account for and (2) institutional owners vary in investment horizon, which in turn both affect the extent to which expectations conflict and can agency problems arise.
First, pressure-sensitive institutions, such as banks and insurance companies, typically have a variety of strong business relationships with the companies in which they hold stock (Zahra, Neubaum & Huse, 2000). Consequently, when conflicts arise regarding strategic decisions, such as CSR investments, investors may shy away from challenging corporate management (Fligstein & Roe, 1995). Rather, pressure-sensitive institutions are tempted to offload stock when there is potential conflict. Accordingly, there is little effort from pressure-sensitive institutions to address the arising agency problems. At this point, corporate management can feel pressured to retain its investors, leaving them two options; (1) depart from CSR investments, which may cause problems in terms of competitive position, legitimation towards other stakeholders and individual concerns or (2) understate CSR activities in corporate reporting. Accordingly, corporate brownwash as a strategy, becomes more attractive for firm management.
A second important argument for corporate brownwash, which has significant implications for the first, is that pressure-sensitive institutions have a relatively short investment horizon (Neubaum & Zahra, 2005; Dam & Scholtens, 2012), with a focus on short term-profit maximization (Jacobs et al., 2010). The rationale here is that CSR investments are often long-term oriented in nature and only become profitable in the long-run (Johnson & Greening, 1999; Walls & Berrone, 2012). Accordingly, investors with a short investment horizon, tend to focus only on the short-term costs of sustainability programmes while neglecting the long-term benefits, causing discrepancies with corporate managements’ long-term goals. Smith & Lewis (2011) find that conflicting demands in institutional environments can give rise to agency problems, and thus potentially brownwashing behaviour. As a result, when firms have multiple pressure-sensitive institutional investors, and pressures for short-term profitability are high, there is a higher potential of agency relationships and firm sensitivity to engage in corporate brownwash increases. Flowing into the following hypothesis:
Hypothesis 1: The higher the percentage of pressure-sensitive institutional shareholders, the higher the level of corporate brownwash.
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with a long-term investment tend to benefit more from CSR (Johnson & Greening, 1999; Aguilera et al., 2006) and pressure-resistant institutional shareholders tend to not only see these long-term benefits (Turban & Greening, 1997; Dam & Scholtens, 2012), but long-term institutional ownership is even positively associated with CSR performance (Neubaum & Zahra, 2006; Nulla, 2015). Bushee and Noe (2000) find that for this reason, firms with long-term institutional ownership score higher on disclosure rankings. Pressure-sensitive institutions may thus motivate firms to pursue their long-term environmental projects, and thus also report accordingly. As a result, expectations of management and investors converge, agency problems weaken and the sensitivity to engage in brownwash diminishes. These observations suggest the following hypothesis:
Hypothesis 2: The higher the percentage of pressure-resistant institutional shareholders, the lower the level of corporate brownwash.
Minority ownership
As opposed to institutional owners, minority ownership regards private individuals or smaller parties that opt to make investments by purchasing firm stock (Dam & Scholtens, 2012). Concurrently, minority owners have shown to make significantly different investment decisions as institutional investors (Dam & Scholtens, 2012; Walls & Berrone, 2012). From an agency perspective, these differing investment decisions can derive from diverging shareholder and management interests. Also, minority investors have relatively high costs to obtain all relevant information and are unable to directly challenge corporate management. I argue that minority investors are like banks and insurance companies, more pressure-sensitive investors. This claim is based on the motivations of minority investors. Graham and Kumar (2006) and Sialm and Starks (2009), state that the majority of individual investors is motivated by maximizing short-term returns, dividends and possibly tax incentives, only some are ethically motivated (Bollen, 2007). Moreover, Eurosif (2010) reported that only a fraction of responsible investments is made by individual investors. In contrast to pressure-resistant institutional owners, who demonstrated to value the long-term effects of CSR investments. This short-term focus of individual shareholders is explicated by the negative effects of “green claims” on firm share prices and market value (Jacobs, Singhal & Subramanian, 2010; Lyon et al., 2013). Accordingly, when management is motivated to pursue long-term sustainability projects, there is an increased potential of agency problems. Therefore, out of fear for shareholder repercussions, management may be more reserved and cautious in reporting its environmental activities. This reasoning is specified, in line with Figure 1, in the following hypothesis.
Hypothesis 3: The higher the percentage of minority shareholders, the higher the level of corporate brownwash.
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Variables Corporate Brownwash Literature Pressure-sensitive institutional ownership+
Brickley, Lease & Smith, 1988; Roe, 1994; Johnson & Browning, 1999; Bushee and Noe ,2000; Zahra, Neubaum & Huse, 2000; Brown, Helland & Smith, 2006; Neubaum & Zahra, 2006; Smith & Lewis; 2011; Dam & Scholtens, 2012; Walls
& Berrone, 2012; Kim and Lyon, 2014; Testa et al., 2018.
Pressure-resistant institutional ownership
-Brickley, Lease & Smith, 1988; Coffey & Fryxell, 1991; Graves & Waddock, 1994; Useem, 1993; Turban and Browning, 1997; Johnson & Browning, 1999;
Bushee and Noe ,2000; Zahra, Neubaum & Huse, 2000; Aguilera et al., 2006; Neubaum & Zahra, 2006; Dam & Scholtens, 2012; Rao, Tilt & Lester, 2012;
Walls & Berrone, 2012; Kim and Lyon, 2014; Nulla, 2015.
Minority
ownership
+
Kumar, 2006; Bollen, 2007; Sialm & Starks 2009; Eurosif, 2010; Jacobs, Singhal & Subramanian, 2010; Dam & Scholtens, 2012; Walls & Berrone, 2012; Lyon et
al., 2013
FIGURE 2: Effects of ownership on corporate brownwash
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RESEARCH DESIGN
Data Collection and Sample
The starting point of data collection is the Thomas Reuters dataset ASSET4. The ASSET4 dataset is compiled by a team of 130 analysts, that systematically collect environmental, social and governance (ESG) data (Miroshnychenko et al., 2017). Altogether over 900 data points reflect in 250 key performance indicators (KPI’s), of which I use 45 to build an index for corporate brownwash. My initial sample is equally sourced from ASSET4 and consists of 1153 publicly traded European firms, using data on 2016 for ESG information and data on 2015 for all ownership data and control variables. This 1-year lag is introduced as the firm’s ownership and financial effects can have a delayed impact on environmental practices and communications (Hawn & Ioannou, 2016). The use of European firms stems from wide availability of European data in ASSET4, in comparison to the US and other parts of the world. Additionally, most financial and ownership data is sourced from Orbis. Providing detailed company data on shareholders and financial indices. After combining data sources and correcting for outliers, standard deviation (S.D.) times 5 or higher, incomplete and missing data the sample comprised 694 publicly traded European firms reflecting 18 industries and 29 countries.
Measures
To conduct the analyses, I build one main dependent variable, three independent variables and eight control variables. The constructs are based on prior research in the field of corporate governance and corporate social responsibility. An overview of all definitions and sources can be found in Appendix A.1.
Dependent Variables
For the dependent variable, a measure of corporate brownwash, I use indices similar to that of Hawn and Ioannou (2016), Testa et al. (2018) and Miroshnychenko et al. (2017). Specifically, I build a Discrepancy Index that captures the relative gap between a firm’s internal ESG practices and a firm’s external ESG communications. To do so, I first construct measures of internal (Green Practices Index) and external (Green
Communications Index) ESG actions.
Green Practices Index (GCI) & Green Communications Index (GPI)
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Brownwash (BW)To measure corporate brownwash I build the Discrepancy Index. The aim of the Discrepancy Index is to capture the relative gap between a firms’ GCI – and GPI Score. To do so adequately, I standardize both GCI and GPI to have a mean of zero and a standard deviation of one (Nichols, 2007). This procedure involved subtracting from the variable sample mean, and then dividing this difference by the sample standard deviation. Subsequently, the standardized GCI Score is subtracted from the standardized GPI Score in the Discrepancy Index (Walker & Wan, 2012). Accordingly, values above zero represent firms that have relatively high internal ESG practices compared to their external ESG communications. Thus, the higher the value in the Discrepancy Index, the higher the likelihood that a firm is underreporting its environmental activities, i.e. corporate brownwash.
Independent Variables
For the analysis there are three main variables, which are tested in all models. Respectively, I built variables for (1) pressure-sensitive institutional ownership, (2) pressure-resistant institutional ownership and (3) minority
ownership.
Pressure-sensitive Institutional ownership (PSI)
The method for building PSI regards an estimation of the percentage of pressure-sensitive institutional investors (i.e. banks and insurance companies). Zahra, Neubaum and Huse (2000) did so by aggregating shares held by particular types of ownership. Also Dam and Scholtens (2012) aggregated by shareholder type. I use Orbis to source the five largest pressure-sensitive institutional shareholders for each firm in 2015. I focus specifically on the five largest shareholders as only the more prominent investors have to potential to significantly influence corporate managements’ environmental disclosure strategy (Neubaum & Zahra, 2006; Rao, Tilt & Lester (2012). The five largest shareholders combined are then aggregated to represent a companies’ PSI Score.
Pressure-resistant Institutional ownership (PRI)
The procedure for measuring a firms’ PRI Score is similar to computing the PSI Score. In this instance, the aggregate of holdings of the five largest pressure-resistant institutional investors (i.e. pension funds and foundations) represents a firms’ PRI Score. Data is equally sourced from Orbis for the year 2015.
Minority ownership (MIN)
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Control Variables
In all models, the control variables Boards Size, Board Independence, Environmental Compensation Incentive
Structure, Country ESG Score, Log of Total Assets, Return on Assets, Debt to Equity and Industry have been
included. All control variables are collected for 2015.
Board Size (BS)
Several scholars have deemed Board Size to be an influential factor for CSR (Brown, Helland & Smith, 2006; Walls & Berrone, 2012; Shamil et al., 2014). In general academics pose that larger boards decrease the influence of firm management and therefore agency problems (Brown, Helland & Smith, 2006). Alternatively, larger boards have been associated with ESG activities and higher environmental reporting quality (Rao, Tilt & Lester, 2012). I source the number of board members from ASSET4.
Board Independence (BI)
Board independence is defined as “Does the company comply with general regulations regarding board
independence”. It is thus a dummy variable (0 = NO - 1 = YES, ASSET4). Existing research shows independent boards reduce agency problems in the organization through independent oversight and monitoring of firm management (Fama, 1980; Brown, Helland & Smith, 2006).
Environmental Compensation Incentive Structure (ECIS)
ECIS is another dummy variable that measures whether senior executive’s compensation is linked to CSR and
ESG sustainability targets (0 = NO – 1 = YES, ASSET4). Such incentive structures have proved to increase environmental activities (Cordeiro & Sarkis, 2008; Berrone & Gomez-Mejia, 2009-2; Williams, 2010). At least brownwash should be demotivated, though greenwash can become more attractive.
Country ESG Score (CESG)
CESG is the only variable that is sourced from neither Datastream ASSET4 nor Orbis. Concurrently, I use
RobecoSAM’s country sustainability ranking 2015 (RobecoSAM, 2015) to match a company’s home country and its respective Country ESG Score. RobecoSAM uses a comprehensive framework to assess a country’s ESG performance, which has a strong emphasis on providing accurate information for investment decisions.
Log of Total Assets (Log_TA)
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Return on Equity (ROA)ROA is used as a measure of performance, as many studies find a relationship between financial and social
performance (Dam & Scholtens, 2012). As the availability of slack resources can foster innovative and environmental activities (Zahra, Neubaum & Huse, 2000). I use Orbis to compute ROA.
Debt to Equity (DtE)
Debt to Equity, equally sourced from Orbis, relates to the level of risk that a firm is willing to take (Barnea &
Rubin, 2010; Dam & Scholtens, 2012). Which has implications for both ESG activities and ownership structure.
Industry (IND)
A dummy variable for Industry is construed using Datastream and existing literature. Representing 1 for polluting industries (e.g. energy, mining and agriculture), and 0 for less environmentally regulated industries (e.g. financial services, wholesale and communication) (Berrone & Gomez-Mejia, 2009-1; Kim & Lyon, 2015).
Empirical Strategy
Once the raw data was collected and checked for irregularities, outliers and missing observations, the variables were prepared for analysis. Accordingly, I formulated multiple regression equations testing the proposed hypotheses, respectively the (Model 1) Control Variables and (Model 2) Brownwash. Additionally, I conduct two auxiliary analyses that help understand the interplay between internal (Model 3) and external (Model 4) ESG actions. Finally, I conduct a supplementary logistic regression analysis on the lower regions of the Discrepancy
Index (Model 5) (see Additional Regression Analyses for a more thorough explanation). All tests are performed
in STATA. Descriptive statistics are provided as I test for multicollinearity (TABLE 3).
TABLE 2:
Regression Equations
In each of these regression equations, Yi represents the dependent variable tested in each model, βi the regression coefficients and βcontrols the regression coefficients of all 8 control variables.
[Model 1]
Y
1 BW=
β
0+ β
controls[Model 2]
Y
1 BW=
β
0+ β
1 PSI+ β
2 PRI+ β
3 MIN+ β
controls
[Model 3]
Y
2 GPI=
β
0+ β
1 PSI+ β
2 PRI+ β
3 MIN+ β
controls[Model 4]
Y
3 GCI=
β
0+ β
1 PSI+ β
2 PRI+ β
3 MIN+ β
controls[Model 5]
Y
4 DI < -1= ln
P (Y5 DI < -1)
=
β
0+ β
1 PSI+ β
2 PRI+ β
3 MIN+ β
controls18
RESULTS
This section explains and visualises the output of the analyses and equations described in the methodology section. It contains a description of the statistics and collinearity, the main regression results and the results of the additional analyses.
Descriptive statistics and correlations
Descriptive statistics and correlations are presented in table 3. On average, for the 694 observations, firms have higher scores for GPI (mean = 63,8) than GCI (mean = 39,6), meaning that on average firms perform more internal ESG actions than they communicate externally. Implications of this gap for the regression output are weighted in the discussion. Additionally, on average companies are owned for 13,9 per cent by pressure-sensitive institutions (banks and insurance companies) and for 6,8 per cent by pressure-pressure-sensitive institutions (pension funds and foundations). Though actual percentages for PSI and PRI are likely to be higher (see limitations). Alternatively, around 67,8 per cent of ownership is controlled by minority shareholders. Note that
PSI and PRI are mutually exclusive, PSI and MIN are not and neither are PRI and MIN. Indicating institutional
investors can be considered minority investors if they hold less than 5 per cent of shares.
At first sight there are no real problems with multicollinearity. BW has moderate correlations with GPI and GCI (r = -0.426; r = 0.117) as BW is constructed using these indices. Furthermore, table 3 shows a strong correlation for GPI and GCI, nonetheless Hawn & Ioannou (2016) made sure that they are independent constructs. Aside from that only Board Size and the natural Logarithm of Total Assets (r = 0,407) show moderate levels of correlation. Though as I produce the Variance Inflation Factor (VIF) for model 2, none of the variables show problems with multicollinearity as none of the values exceed 10 (Robinson & Schumacker, 2009). Also the mean of the variance inflation factor (VIF) is not considerably larger than one (Mean VIF = 1.15) (Alin, 2010).
Main Regression Results
Table 4 presents the results of the multiple regression analyses performed in Model 1 and Model 2. Model 1 tests all control variables on the Discrepancy Index, and thus corporate brownwash. Overall model fit is significant (Prob. > F = 0,000; ajd. squared = 0,059). In Model 2, ownership effects are introduced and adjusted R-squared increases to 0,086.
Model 2 tests the effects of ownership on the relative gap between internal ESG practices and external ESG
pressure-Variable
(1) BW
1
(2) GCI
0,171**
1
(3) GPI
-0,426**
0,819**
1
(4) PSI
0,156**
-0,091** 0,001
1
(5) PRI
0,137**
-0,115** -0,038
0,198**
1
(6) MIN
0,150**
0,051
0,152**
0,256**
0,164** 1
(7) BS
-0,130**
0,331**
0.279**
-0,150** -0,158** -0,048
1
(8) BI
-0,028
0,117**
0,109**
-0,084*
0,006
-0,027
0,243**
1
(9) ECIS
0,044
0,117**
0,155**
0,065
0,008
0,025
0,064*
0,013
1
(10) CESG
0,185**
-0,051
0,058
0,241**
0,152** 0,290** -0,182** -0,128** 0,075*
1
(11) Log_TA
-0,19**
0,540**
0,481**
-0,15**
-0,132** 0,032
0,406**
0,134**
0,082*
-0,074*
1
(12) ROA
-0,025
0,005
-0,011
0,059
0,049
0,070*
-0,093** -0,008
-0,025
0,089** -0,121** 1
(13) DtE
-0,089*
0,061
0,012
-0,102** -0,048
0,043
0,038
0,027
0,011
0,000
0,105**
-0,051
1
(14) IND
-0,024
0,216**
0,219**
-0,090** -0,018
-0,021
0,057
0,048
0,007
0,007
0,223**
-0,036
-0,03
1
VIF DI
-
-
-
1,3
1,1
1,24
1,28
1,07
1,03
1,17
1,3
1,04
1,04
1,06
Mean
0,024
39,6
63,8
13,91
6,8
67,79
9,91
0,44
0,12
7,18
15,23
5,23
2,03
0,5
S.D.
0,583
19,1
21,8
11,63
8,52
24,5
4,55
0,5
0,32
0,77
1,54
10.16
10,26
0,5
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)
Number of observations: 694 ---- Significance *p < 0,1 ** p < 0,05
20
Variables
Coef.
Sig.
Coef.
Sig.
BS -0,006 0,244 -0,005 0,356 BI 0,004 0,922 -0,010 0,815 ECIS 0,068 0,302 0,062 0,352 CESG 0,108 0,000*** 0,061 0,055* Log_TA -0,061 0,000*** -0,064 0,000*** ROA -0,004 0,045** -0,004 0,040** DtE -0,004 0,045** -0,004 0,069* IND -0,031 0,462 -0,007 0,871 PSI - - 0,005 0,025** PRI - - 0,003 0,237 MIN - - 0,002 0,023** Constant 0,233 0,459 -0,356 0,267 Prob > F R-squared Adj. R-squared N *p < 0,1 ** p < 0,05 *** p < 0,01
Model 1
Model 2
0,000*** 0,000***BW
BW
694 694 0,069 0,100 0,059 0,860resistant institutional ownership should negatively impact corporate brownwash. Model 2 presents a positive, not negative, coefficient for pressure-resistant ownership, at a non-significant level (p = 0,237). Thus, I find no support for hypothesis 2. Possible explanations and additional insights for this discrepancy are debated in the discussion. Hypothesis 3 states that higher percentages of minority ownership should positively impact the level of corporate brownwash. Model 2 displays a positive coefficient for minority ownership at a significance level (p = 0,023). Accordingly, minority ownership has a positive impact on the gap between internal ESG actions and external ESG reports, providing support for hypothesis 3 and the claim that minority ownership positively impacts corporate brownwash.
TABLE 4: Lagged Regression Results: Model 1 & 2
Regarding the control variables, the Logarithm of Total Assets (p < 0,01) and Return on Assets (p < 0,05) showed a strong significant effect across all models. Both have negative coefficients in the Discrepancy Index. Indicating that both firm size and profitability have a negative impact on the gap between internal and external actions, diminishing corporate brownwash. As is in line with the main findings of Kim and Lyon (2015), and Testa et al., (2018). Debt to Equity has a negative impact at a weak significance level (p = 0,069). Additionally,
Country ESG Score seems to positively impact corporate brownwash. Board Size, Board Independence, Environmental Compensation Incentive Structure and Industry show no significant impact on corporate
21
Auxiliary Regression Results
Before I debate the regression results in more depth, I provide additional analyses on the Green Practices Index,
Green Communications Index and the lower region of Discrepancy Index. Performing these analyses gives
additional insights on the structure of the data and robustness of the models. More importantly, it provides a more thorough understanding of the interplay between internal practices and external ESG communications, and indicates whether results are in line with the aforementioned reasoning in the literature section. Table 5 displays the output of Model 3 to 5. In Model 3, I test the effect of ownership on a firm’s internal ESG practices in the
Green Practices Index. In Model 4, I do the same for a firm’s external ESG Communications in the Green Communications Index. In Model 5, I test for effects on the lower region of observations in the discrepancy
index, as it tests how ownership structure affects firms with very low levels of corporate brownwash and rather coherent communications and practices.
Model 3 shows a strong positive effect (coef. = 0,099; p = 0,000) for minority ownership on internal ESG
practices. Contrary to aforementioned reasoning that states that minority investors place less value on ESG activities (Dam & Scholtens, 2012). Subsequently in Model 4, minority ownership shows another, though weaker (coef. = 0,055; p = 0,075), positive impact on external ESG communications. The implications of these seemingly contradicting results, and the disparity between the effects on GPI and GCI, are weighted in the discussion. Additionally, in Model 3, for pressure-sensitive institutional ownership, I find no direct relationship (coef. = -0,022; p = 0,708) with internal ESG practices. However, in Model 4, pressure-sensitive institutional ownership does seem to influence external ESG communications (coef. = -0,128; p = 0,061), such that firms report fewer ESG activities. Which in turn, in Model 2, results in a positive effect on corporate brownwash. Similar to the main regression analysis, the influence of pressure-resistant institutional investors remains limited in both Model 3 and 4.
Model 5 highlights some interesting results, as it tests for the lower region of observations of the Discrepancy Index. This means that it tests for firms that have relatively high levels external ESG communications, compared
22
Variables
Coef. Sig. Coef. Sig. Odds. Ratio Coef. Sig.
BS
0,325
0,037**
0,453
0,012**
0,996
-0,005
0,926
BI
-0,278
0,814
-0,070
0,959
0,776
-0,253
0,518
ECIS
6,072
0,001***
4,986
0,018**
1,705
0,534
0,319
CESG
1,658
0,058*
0,398
0,693
0,610
-0,494
0,027**
Log_TA
4,786
0,000***
6,379
0,000***
1,689
0,524
0,001***
ROA
0,097
0,085*
0,193
0,003***
1,062
0,060
0,003***
DtE
-0,082
0,123
-0,009
0,886
0,995
-0,005
0,684
IND
3,627
0,003***
3,937
0,005***
0,737
-0,305
0,447
PSI
-0,022
0,708
-0,128
0,061*
0,999
-0,001
0,967
PRI
0,066
0,370
0,000
0,997
1,032
0,031
0,53*
MIN
0,099
0,000***
0,055
0,075*
0,983
-0,17
0,53*
Constant
-32,076
0,000
-68,600
0,000
-
-7,05
0,007
Prob > F
Prob > Chi2
R-squared
Adj.
R-squared
Pseudo R2
N
*p < 0,1 ** p < 0,05 *** p < 0,01
694
694
0,000***
0,000***
0,258
0,297
-
--
-0,269
0,310
Model 3
Model 4
GPI GCIModel 5
DIz < 10,101
694
0,003***
-TABLE 5:
Additional Lagged Regression Results: Model 3 to 5
For the controls, Log. of Total Assets shows positive significant effects across all three models. For Return on
Assets similar effects, though only a weak significance level in Model 5. For the first time, we see that board size
has a positive effect on both GPI and GCI (p < 0,05). Also incentives bound to corporate social performance seem to positively affect GCI and GPI. Finally, polluting industries seem to produce significant efforts to improve their external communications and internal green practices (p < 0,01).
DISCUSSION
23
Montgomery, 2013; Marquis & Toffel, 2013; Bowen, 2014; Marquis, Toffel & Zhou, 2016) has neglected an equally interesting phenomena; corporate brownwash.
Building upon work of Kim and Lyon (2015) and using theories on organizational decoupling, this thesis aims to reduce ambiguity in the field of sustainable governance and resolute questions unanswered in current literature. To do so, I performed multiple regression analyses on a sample of 694 European stock-listed firms. In specific, I test for the effects of three distinct ownership structures on corporate brownwash; (1) pressure-sensitive institutional ownership, (2) pressure-resistant institutional ownership and (3) minority ownership. Results show that pressure-sensitive ownership structures (i.e. banks & insurance companies and minority investors) are indeed an influential factor for corporate brownwash. While pressure-resistant institutional ownership remains limited in its effects. Additionally, the auxiliary analyses provide relevant insights on the interplay between internal and external ESG actions. Taken together, the results bear some significant implications for both theory and practice. Both are now discussed in depth, along with the relevant limitations of this study and a premise for future research.
Theoretical Implications
24
Likewise, lower shareholder concentration in the form of minority ownership, has a positive impact on corporate brownwash. In line with the notion that green claims can negatively affect share prices (Jacobs, Singhal & Subramanian, 2010; Lyon et al., 2013) and motivations of minority investors (Sialm & Starks, 2009; Dam & Scholtens, 2012). Accordingly, firms show to respond by limiting ESG communications. However, the auxiliary analyses provide several interesting and perhaps seemingly contradicting insights. As firms with high levels of minority ownership show a strong positive impact on internal ESG practices, which could implicate that minority investors do value firm ESG activities to a certain extent. This is in line with findings from Walls and Berrone (2012), who find that lower shareholder concentration, had a positive impact on CSR. Moreover, it indicates that minority investors value substantive environmental action over merely symbolic environmental reports, at least to the extent that firms do not suffer reputational damage from environmental scandals. Either way, this interplay between internal and external actions provides a captivating direction for future research.
The effect of pressure-resistant institutional ownership remains limited across all models. Which does not confirm that the long investment horizon and embedded stakeholder pressures for pension funds and foundations result in better corporate governance (Rao, Tilt and Lester, 2012) or higher environmental performance (Neubaum & Zahra, 2006; Dam & Scholtens, 2012). Possible explanations lie in the relative lower levels of pressure-resistant ownership, allowing them to have only limited influence on environmental strategies. Alternatively, the apprehended variable might be subject to improvement as explained in the limitations section. Results show only one moderate significant effect for pressure-resistant ownership, which is to be interpreted with caution. Specifically, only firms with rather coherent environmental practices and communications, seem to have more pressure-resistant owners. This corresponds with the notion that pension funds and foundations are under pressure from their own constituent to pursue sustainable corporate governance (Zahra, Neubaum & Huse, 2000) and is in line with literature that states that long-oriented institutions are associated with higher quality of environmental reports (Turban & Greening, 1997; Rao, Tilt & Lester, 2012).
Secondly, this thesis advances the increasing body of literature on environmental performance and CSR (Bansal & Roth, 2000; Walls & Berrone, 2012) as I investigate how governance effects translate into environmental reporting strategies (Delmas & Burbano, 2011; Kim & Lyon, 2015). I build upon Hawn and Ioannou’s (2016) interplay between internal - and external ESG actions of the firm, and show that firms make a clear distinction between the two as they anticipate different stakeholder expectations. Accordingly, I contribute to the debate on whether it does or does not “pay to be green” (Porter & van der Linde, 1995; King & Lenox, 2001; Porter & Kramer, 2011; Aldy & Stavins, 2012) by providing a more balanced view. Specifically, I pose that corporate management stands to benefit for a variety motivations (e.g. competitive position, legitimacy and personal satisfaction), while investors only benefit contingent on their investment horizon (Neubaum & Zahra, 2006). Therefore, rather than focusing on one resolute answer, the debate could focus on “for who” and “when”, it pays to be green. By making this distinction, our understanding can grow on how different stakeholders such as investors and managers, as well as consumers and legislators, impact substantive environmental action.
25
agency relationships (Ross; 1973; Ullmann, 1985; Eisenhardt, 1989) between investors (principals) and firm management (agents) can lead to misleading communication strategies such as corporate brownwash, and have the potential to deter the quality of environmental reports. As the existence of information asymmetries, conflicting interests and diverging institutional pressures (Scott, 1995; Berrone & Gomez-Mejia, 2009-1) can motivate firms to decouple communications from practice. Results indicate support for such reasoning, providing possibilities for future applications in this field of research.
Finally, the control variables offer some valuable insights. Both firm size (Log of Total Assets) and firm profitability (Return on Assets) seem to negatively impact corporate brownwash, while having a positive effect on both internal – and external ESG actions. In line with Kim and Lyon (2015) and Testa et al. (2018), where financial performance and firm growth deter brownwash. Furthermore board size and an incentive structure for environmental performance positively influence ESG actions, as expected and explained in previous research (Cordeiro & Sarkis, 2008; Berrone & Gomez-Mejia, 2009-2; Rao, Tilt & Lester, 2012). Also consistent with previous research, polluting industries seem to focus extensively more on both green communications and practices, in comparison to less polluting and less regulated industries. Altogether, this study attempts to contribute to current literature in a number of ways. I confirm and build upon previous research in the field and provide an interesting outlook for future research. Though, not only does the study carry academic relevance, it can also provide practitioners with more understanding of environmental strategies and the stakeholders involved.
Practical Implications
First of all, society and investors need to become aware that firms deliberately pursue misleading communication strategies. Moreover, not only do firms exaggerate environmental performance, the infamous greenwash, but firms also purposefully underreport their environmental activities. Though the consequences of such inadequate reporting can be debated, as such firms actually do take substantive environmental actions. Sustainable reporting initiatives such as RobecoSAM, the Global Reporting Initiative (GRI) and Morgan Stanley Capital International (MSCI) should continue to focus on improving worldwide reporting standards (Holland & Foo, 2003), and realize the potential for firms to underreport environmental activities, which allows investors to make adequate investment decisions. Furthermore, this study can help firms in identifying how certain stakeholders influence their decisions and actions in environmental strategies. As the pressures from certain stakeholders, especially shareholders, can be ambiguous in their implications, “to be green or not to be?” I reduce this ambiguity by explaining which types of shareholders typically have what expectations and impact. Either way, an increase in awareness of the processes and causes that deter environmental reporting quality, stand to benefit both investors and firm management.
Limitations and Future Research Directions
26
where theories on consumer behaviour can explain how green claims affect quality perceptions. Research in this area would be highly interesting as to see how it complements and differs to corporate brownwash. Secondly, this study entails some measures and constructs that can be subject to review. The measurement of pressure-institutional pressure-resistant ownership captures ownership by pension funds instead of public pension funds as originally indicated (Brickley, Lease & Smith, 1988; Zahra, Neubaum & Huse, 2000). This could possibly explain the limited results for the effects of resistant ownership. Alternatively, both data on pressure-sensitive and pressure-resistant ownership contained irregularities that likely resulted in lower percentages of such ownership than is actually the case. Additionally, data on ownership in Orbis was only sufficiently available for 2015, limiting the options for a panel regression, among other reasons. Either way, more complete accurate and longitudinal ownership data could help further validate the proposed effects. Another concern that has proved to be difficult to remediate, is that greenwash and brownwash are not mutually exclusive, though in apprehended measurement instruments they often are. In practice, a firm may exaggerate environmental performance to certain stakeholders (e.g. consumers and legislators), while understating environmental activities to others (e.g. investors). The abnormal distribution of firms underreporting in this sample using the measurements of Hawn and Ioannou (2016) is an example of such problems. Future exploration of these issues could enrich our understanding on the variety of communication strategies that a firm can adopt. With regard to generalizability, I only test the effects on European firms, meaning that results are to be interpreted with caution in other parts of the world. As reporting quality already significantly differs per country (Country Sustainability Ranking, RobecoSAM), though I find only weak support for this claim. Finally, as this study only focuses on three distinct ownership types, the effects of other governance structures, in particular managerial ownership, pose an interesting course for future academic research.
CONCLUSION
27
Variable
Abbreviation
Definition
Source
Pressure-sensitive
Institutions PSI
The aggregated percentage of shares of the 5 largest shareholders of the following type: banks &
insurance companies
Orbis
Pressure-resistant
Institutions PRI
The aggregated percentage of shares of the 5 largest shareholders of the following type: pension funds &
research institutes
Orbis
Minority Ownership MIN Percentage of shareholders with less than 5% of
shares (free floating shares / total shares) Datastream
Board Size BS The number of board members Datastream ESG ASSET4
Board Independence BI Does the company comply with regulations
regarding board independence? (0 = No - 1 = Yes) Datastream ESG ASSET4 Environmental
Compensation Incentive Structure
ECIS Is the senior executive's compensation linked to
CSR/H&S/Sustainability targets? (0 = No - 1 = Yes) Datastream ESG ASSET4
Country ESG Score CESG See Country Sustainability Ranking (RobecoSAM,
2015) RobecoSAM
Log of Total Assets TA The natural logarithm of the total assets owned by
the company Orbis
Return on Assets ROA Net Earnings / Total Assets Orbis
Debt to Equity DtE Total Liabilities / Total Equity Orbis
Industry type IND Polluting Industries (1) Less Regulated Industries (0) Datastream ESG ASSET4
Green Practices
Score GPI The sum of 21 internal practice KPI's (Appendix A.2) Datastream ESG ASSET4
Green Communications
Score
GCI The sum of 24 external ESG communication KPI's (Appendix A.3) Datastream ESG ASSET4
Lower region -
Discrepancy Index DI < -1
Firms with relatively coherent ESG practices and
communications (S.D. < -1 = 1; S.D > 1 = 0) Datastream ESG ASSET4
Independent Variables - (2015)
Control Variables - (2015)
Building / Intermediary Variables - (2016)
Dependent Variable - (2016)
Discrepancy Index BW (DI) Datastream ESG ASSET4
The relative gap between a companies' internal ESG practices and external ESG communications
(Standardized GPI - Standardized GCI)
APPENDIX A: - MEASURES & EXAMPLES
28
Appendix A.2 - Green Practices Index (Internal ESG Actions - Hawn & Iannou, 2016)
Example GEVAERT.
1. Percentage of women on the board of directors.* 1
2. Percentage of non-executive board members on the audit committee as stipulated by the company.* 1
3. Percentage of non-executive board members on the nomination committee.* 1
4. Percentage of independent board members as reported by the company.* 1
5. Does the company have a policy to support the skills training or career development of its employees? 1 6. Does the company have a policy to improve employee health & safety within the company and its supply chain? 1 7. Does the company use environmental criteria (ISO 14000, energy consumption, etc.) in the selection process of its suppliers or sourcing partners? 1
8. Does the company make use of renewable energy? 0
9. Does the company have a policy to improve its energy efficiency? 1
10. Does the company have a policy to improve its water efficiency? 1
11. Does the company develop products or technologies that are used for water treatment, purification, or that improve water-use efficiency? 0
12. Does the company have a policy to reduce emissions? 1
13. Does the company have a policy for ensuring equal treatment of minority shareholders, facilitating shareholder engagement, or limiting the use of anti-takeover devices?
1 14. Does the company’s statutes or by-laws require that stock options be only granted with a vote at a shareholder meeting? 1 15. Does the company have a policy for performance-oriented compensation that attracts and retains the senior executives and board members? 1
16. Does the company have a policy for maintaining a well-balanced membership of the board? 1
17. Does the company have an audit committee with at least three members and at least one “financial expert” within the meaning of Sarbanes-Oxley? 0
18. Does the company have a CSR committee or team? 1
19. Does the company have a policy to guarantee the freedom of association universally applied independent of local laws? AND Does the company have a policy for the
exclusion of child, forced, or compulsory labor? 1
20. Does the company have a competitive employee benefits policy or ensure good employee relations within its supply chain? AND Does the company have a policy for
maintaining long-term employment growth and stability? 1
21. Does the company have a work–life balance policy? AND Does the company have a diversity and equal opportunity policy? 0,5
Total Score (sum) 17,5
GPI Score (sum / #) 0,833333333
