The emission trading system, risk management committee and voluntary corporate response to climate change – a CDP study

• Date: 07 May 2019
• DOI: https://doi.org/10.1108/IJAIM-04-2017-0050
• Published date: 07 May 2019
• Pages: 262-283
• Author: Mohammed Hossain,Omar Farooque

The emission trading system, risk

management committee and

voluntary corporate response to

climate change –a CDP study

Mohammed Hossain

Griff‌ith University, Nathan, Queensland, Australia, and

Omar Farooque

University of New England, Armidale, New South Wales, Australia

Abstract

Purpose –The purpose of this study is to examine the impact of emission trading system, board risk

managementcommittee and f‌irm age on f‌irms’responsiveness to climatechange in Carbon Disclosure Project

(CDP) 2011. More specif‌ically, this study investigates whether global corporation’s responses on carbon-

related disclosureare inf‌luenced by some specif‌ic attributes.

Design/methodology/approach –The study covers a sample of 500 companies in 38 countries in 12

geographical locations. It uses the carbon disclosure scores in the CDP 2011 as the dependent variable. The

authors estimatethe OLS regression model to investigate the hypotheses.

Findings –The f‌indings demonstrate that the presence of an emission trading system, a board risk

management committee and the f‌irm age have a signif‌icant positive relationship with carbon disclosure

scores (i.e. CDP scores).However, the impacts of the board risk management committee and f‌irm age on CDP

scores are not moderated by the emission trading system at the f‌irm level, suggesting that they have an

independentand substitutive effect on climate change-related riskdisclosure.

Originality/value –The study may be of relevance toinvestors and other stakeholders in evaluating the

accountabilityof companies in relation to strategies for managing climate risk.

Keywords Corporate social responsibility, Climate change, CDP, Emission trading system

Paper type Research paper

1. Introduction

This study examines the impact of emission trading systems, board risk management

committees and f‌irm age on f‌irms’responsiveness to climate change. It uses the Carbon

Disclosure Project’s (CDP) (a non-governmental and not-for-prof‌it organisation) “carbon-

related disclosure score (CDS)”to determine the extent to which global companies

proactively addressthe climate change agenda.

Climate change is arguably the most persistent threat to global stability in the current

century. There has been growing scientif‌ic evidence that the “global warming”or

“greenhouse effect”is real,which ultimately creates a serious threat to the quality of human

lives (Giannarakis et al., 2017;Luo and Tang, 2014;Luo et al., 2012;Allen et al., 2009;

Bebbington and Larrinaga-Gonzalez,2008). Greenhouse gas (GHG) emissions have become

The authors are grateful to the f‌inancial support from the Grif‌f‌ith University Business School

internal research grant.

IJAIM

27,2

262

Received20 April 2017

Revised16 October 2017

Accepted21 December 2017

InternationalJournal of

Accounting& Information

Management

Vol.27 No. 2, 2019

pp. 262-283

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-04-2017-0050

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

one of the most impacting environmental issues today (Villoria-Saez et al., 2016;Wang and

Wang, 2015;Hedberg et al.,2010). More importantly, because of continuous changing in

global warming, it attracts growing levels of attention to various stakeholders (e.g. states,

public, investors andlobbyists) and they have put climate change on corporate agendasand

expect f‌irms to disclose relevant GHG information (Depoers et al., 2016). Many emission

reduction strategies have been recently implemented worldwide that aim to reduce GHG

emissions (Lincoln, 2012).The greenhouse effect is caused primarily by the burning of wood

and fossil fuels (coal, natural gas, oil and peat) which release enormous amounts of carbon

dioxide (CO

2

) into the atmosphere (Oskamp, 2007). Emissionscontinue to rise rapidly (Lash

and Wellington, 2007). This is supported by the recenttrends in global CO

2

emissions 2012

report by the European Commission’s JointResearch Centre (Olivier et al.,2012).The report

stated that:

After a 1% decline in 2009 and an unprecedented 5% surge in 2010, global CO

2

emissions

increased by 3% in 2011, compared to the previous year, reaching an all-time high of 34 billion

tonnes (p. 10).

This is because of the world’s industrial growth. As a result, the Earth’s temperature has

been gradually increasingin tandem (IEA,2016a, 2016b;Flavin and Dunn, 1999; IPCC, 1997;

Schneider, 1997). Becauseof the negative impact of CO

2

emissions on the environment (Karl

and Trenberth, 2003), there is increasing regulatory, customer and societal pressure to

reduce total CO

2

emissions (Masud et al.,2016;Cadez and Czerny, 2016;Okereke and Russel,

2010;Stern, 2007). Becauseof the concern over the danger of climate change and its potential

devastating effect on human life, both governments and global bodies, such as the United

Nations and the EuropeanUnion have so far responded in a variety of ways to deal with the

mitigation and adaptationof policy responses to climate change (Sovacool and Linnér, 2016;

Bebbington and Larrinaga-Gonzalez, 2008). Numerous steps have been taken around the

world to act on GHG. Examples of these actions include: the European Emissions Trading

Scheme (EU ETS), the Kyoto Protocol, Australian Emissions Trading Scheme (AETS),

Carbon Disclosure Project(CDP), etc.

The quest for voluntary disclosure for assessing the environmental performance of

companies primarily dependson having a good corporate governance system in place at the

f‌irm level (Hussain et al., 2016;Cheng and Courtenay, 2006). The extended corporate

governance model complements CSR to provide support for environmental initiatives,

performance and disclosure (Oh et al., 2016;Khan et al.,2016). In a broader sense, corporate

governance covers both corporate f‌inancial and non-f‌inancial disclosure, as it protects the

interests of shareholders and stakeholders (De Oliveira and Jabbour, 2017;Galbreath, 2017;

Jo et al.,2016). Corporate governance primarily impacts the development of organisational

resources (Galbreath, 2010;Hendry and Kiel, 2004;Kiel and Nicholson, 2005). Some

researchers (Cohen et al., 2008;Carcello et al., 2011) suggest that it is imperative to

understand how corporate governance issues impact a f‌irm’s operation activities on risk

disclosures.

Given the discussion above, our mainmotivation of the study is to address the concern of

regulators and to f‌ill the gaps in the literature. As carbon-related disclosure symbolises a

company’s responsiveness to climate change (Damert et al.,2017), this study aims to

investigate whether global corporations’responsiveness to climate change is moderatedby

emission trading systems, board risk management committees and f‌irm age. The specif‌ic

concern is how global companies voluntarily address the disclosure risks of non-f‌inancial

information with special reference to CDP and how the board risk management committee

inf‌luences f‌irms’responsiveness to climate change, as part of corporate governance

Emission

trading system

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