The impact of audit committee attributes on the quality and quantity of environmental, social and governance (ESG) disclosures

• DOI: https://doi.org/10.1108/CG-06-2020-0243
• Published date: 07 December 2020
• Date: 07 December 2020
• Pages: 497-514
• Subject Matter: Strategy,Corporate governance
• Author: Muhammad Arif,Aymen Sajjad,Sanaullah Farooq,Maira Abrar,Ahmed Shafique Joyo

The impact of audit committee

attributes on the quality and quantity of

environmental, social and governance

(ESG) disclosures

Muhammad Arif, Aymen Sajjad, Sanaullah Farooq, Maira Abrar and Ahmed Shafique Joyo

Abstract

Purpose –The purpose of this research is to ascertainthe impact of audit committee (AC) activism

and independence on the quality and quantity of en vironmental, social and governance (ESG)

disclosures for energy sector firms in Australia. This paper aims to und erstand how AC attributes

such as meeting frequency, and the number of independent dire ctors influence the compliance with

the global reportinginitiative (GRI) guidelines and quantity of ESG disclosures.

Design/methodology/approach –Bloomberg ESG disclosure scores and company reported AC

attributes are collected and analysed using the poo led ordinary least square (OLS) regression

framework with Petersen’s (2009) techniqueby using a two-dimensional cluster at the firm and year

level. Further, this paper uses a laggedindependent variable and two-stage least square approach

to address endogeneity concerns.

Findings –The results showa significantpositive effect of AC activism and independence on the level of

compliance with the GRI guidelines, indicating the favourable effect of AC attributes onESG reporting

quality. Likewise, AC attributes positively affect the quantity of ESG disclosures. Notably, the impact of

AC attributesis more pronounced on environmental disclosures.

Originality/value –This paper validates the significance of the management control mechanism in

improving the quality and quantity of ESG disclosures for an environmentally sensitive sector,

hence offering a potential answer to reduce agency and legitimacy issues for the sensitive

industry firms.

Keywords Audit committees, ESG disclosures, Environmentally sensitive industries, GRI compliance,

Audit committee attributes

Paper type Research paper

1. Introduction

In recent times, there have been increasing demands on organisations to be more

responsible towards the environment and society. These demands come from a variety of

stakeholders, including a firm’s shareholders, customers, regulators, employees, suppliers,

social and environmental activist groups, media and creditors (Camilleri, 2015;Hoang,

2018;Kolk, 2008;Maama and Appiah, 2019;Sajjad et al.,2020). Additionally, the uncertain

market conditions such as the recent global financial crisis also require firms to make

sustainable choices while making crucial organisational decisions (Elgergeni et al.,2018;

Garcia-Sanchez et al., 2014). Accordingly, proactive organisations have been making

efforts to improve their business models and reporting systems to meet the increasing

demands of their stakeholders and tackle the challenges posed by the uncertain business

environment (Nazari et al., 2015;Stegeret al.,2007).

Muhammad Arif is based at

Department of Business

Administration, Shaheed

Benazir Bhutto University,

Shaheed Benazirbad,

Pakistan.

Aymen Sajjad is based at

the School of Management,

Massey University, Albany,

New Zealand.

Sanaullah Farooq is based

at the Faculty of

Agribusiness and

Commerce, Lincoln

University, Lincoln, New

Zealand.

Maira Abrar is based at

Konkuk University –Seoul

Campus, Gwangjin-gu,

Republic of Korea.

Ahmed Shafique Joyo is

based at Department of

Business Administration,

Shaheed Benazir Bhutto

University, Shaheed

Benazirbad, Pakistan.

Received 19 June 2020

Revised 31 October 2020

Accepted 5 November 2020

DOI 10.1108/CG-06-2020-0243 VOL. 21 NO. 3 2021, pp. 497-514, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 497

The reporting of information concerning environmental management, corporate social

responsibility (CSR), and compliance with existing best practices of corporate governance

(commonly referred to as ESG –environmental, social and governance) have received

attention from business managers to convey the direction and magnitude of their efforts

towards a sustainable environment and fair society. In particular, the firms belonging to

environmentally sensitive industries (sensitive industries hereafter) such as coal, oil and gas

exploration and distribution make efforts to report improved ESG information to maintain

their legitimacy and neutralise the inherent stigma associated with these industries of being

polluters (Gamerschlag et al., 2011;Garcia et al.,2017). Nevertheless, ESG disclosures

have been mostly voluntary and incongruent due to the absence of standardised reporting

frameworks (Dhaliwal et al., 2011;Goel, 2018; Martı

´nez-Ferrero et al.,2016;Olson, 2010).

Consequently, there have been concerns about the quality and objectivity of ESG reporting.

Ball et al. (2000) and Broadstock et al. (2019) argue that corporate managers mayuse ESG

disclosures to further their reputation and self-interest, highlighting the agency problem

linked to ESG disclosures. Moreover, using the lens of legitimacy theory, Brown and

Deegan (1998) indicate that companies report on their positive social and environmental

activities as opposed to undesirable and harmful actions to maintain their business

legitimacy.

The implementation of a robust and soundreporting system necessitates stringent reporting

standards that are lacking in the case of ESG disclosures. Therefore, an independent and

active internal control system is required to increase the quality and quantity of ESG

reporting without compromising objectivity and shareholder interest. Appuhami and

Tashakor (2017) argue that an independent and engaged audit committee (AC) could

provide efficient oversight that is required to balance the managerial and stakeholder

objectives in the context of ESG disclosures. Karamanou and Vafeas (2005) maintain that

AC is a vital management control mechanism that monitors the financial and non-financial

reporting practices. Similarly, the Blue Ribbon Committee report regard ACs as “the

ultimate monitor” over the organisational reporting process. Therefore, having a proficient

AC is mandatory to improve the quantity and qualityof ESG reporting.

In addition to the traditional role of monitoringthe conduct and reporting of financial matters

for an organisation, the AC now has a broader role of ensuring that organisations follow a

long-term and holistic approach to decision-making by considering the impact of their

operation and business practiceson ESG aspects (Be

´dard et al.,2008;Jamali et al., 2008).

Moreover, the role of ACs becomes even more critical in the case of sensitiveindustry firms

as the operations of these firms have a higher risk of becoming a source of an

environmental hazard, resulting in hefty penalties and fines (Nazari et al.,2015). For

example, in the aftermath of the Exxon Valdez oil spill [1], Exxon Mobil Corporation had to

pay US$287m in compensatory damages and an additional US$5bn to repair the damage

done to the ocean eco-systems (Nelson, 2017).

Thus, the vital role of an AC necessitates sufficient independence and engagement to

achieve the balance between managerial and stakeholder goals vis-a

`-vis ESG disclosures.

According to Be

´dard et al. (2008), AC characteristics affect the financial and non-financial

reporting of a firm. Mnif Sellami and Borgi Fendri (2017) and Mangena and Pike (2005)

report that ACs’ financial expertise has a significant favourable influence on the financial

disclosures of the studied firms. Appuhami and Tashakor (2017) and Li et al. (2012) report

that AC attributes such as independence, committee size and meeting frequency have a

significant impact on CSR and intellectualcapital disclosures, respectively.

Against this background, this study extends the evidence concerning the impact of AC

attributes on the quality and quantityof ESG disclosures for energy sector firms in Australia.

This study contributes to the current body of knowledge in the following ways. Firstly, we

measure the impact of AC attributes, such as the number of independent directors and

meeting frequency, on the quality of ESG disclosures. Secondly, we quantify the impact of

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