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NAME: COURSE: MA INTERNATIONAL ACCOUNTING

SUPERVISOR: TITLE: ENVIRONMENTAL REPORTING AND AIM LISTED COMPANIES SEPTEMBER 2006

DATE:

Project submitted in partial fulfilment of the requirements of the Masters Degree in International Accounting In the School of Business at the University of Northumbria at Newcastle

DECLARATIONS

I declare the following: (1) that the material contained in the dissertation is the end result of my own work and that due acknowledgement has been given in the bibliography and references to ALL sources be they printed, electronic or personal. (2) the w ord count of this dissertation is 14,284 (3) that unless this dissertation has been confirmed as confidential, I agree to an entire electronic copy or sections of the dissertation being placed on Blackboard, if deemed appropriate, to allow future students the opportunity to see examples of past dissertations. I understand that if displayed on Blackboard it would be made available for no longer than five years and that students would be able to print off copies or download. The authorship would remain anonymous. (4) I agree to my dissertation being submitted to a plagiarism detection service, where it will be stored in a database and compared against work submitted from this a or any other school or institution using this service. In the event of the service detecting a high degree of similarity between content within the service this will be reported back to my supervisor and second marker, who may decide to undertake further investigation that may ultimately lead to disciplinary actions, should instances of plagiarism be detected. (5) I have read the Northumbria/NBS Policy Statement on Ethics and Consultancy: Northumbria/NBS Ethics in Research and Consultancy: Guidelines and Procedures for students undertaking Postgraduate research methods modules and dissertations and the Policy for Informed Consent in Research and Consultancy and I declare that ethical issues have been considered, evaluated and appropriately addressed in this research.

SIGNED:

ABSTRACT Key w ords: Environmental reporting Motivation Stakeholder Legitimac y

Environmental reporting has become increasing common among large companies in recent years as a means to provide transparency and accountability to a range of stakeholders. The benefits have been cited to include higher shareholder returns, lower costs through improved efficiency, mitigating risk and increased competitive advantage. However there is little research into smaller companies in the UK and the motivations they require to undertake such reporting. This report aims to address that situation by investigating the motivations and current reporting practices of companies listed on the AIM Index. This index is for companies new to the stock markets which are often new, fast growing dynamic companies but the listing requirements of the AIM Index are less stringent than those of the Main List and so are seen as riskier. A postal questionnaire was used to test the current practice and motivation of these companies and although only a small sample responded the findings give a basis for further research in this area. It was found that the main motivators were legislative requirements and financial considerations which are also motivators for larger companies but other reasons such as competitive advantage, stakeholder accountability or legitimacy theory appear to have no influence over the reporting decision. The information received was tested against a needs hierarchy in order to see what distinguished these smaller companies from their larger counterparts and it was concluded that the smaller companies concentrated their efforts on survival tactics such as financial stability while the larger companies having achieved this were able to turn their efforts to competitive advantage enhancing activities such as reputation enhancement, risk reduction and improved stakeholder relations through environmental reporting.

ACKNOWLEDGEMENTS

TABLE OF CONTENTS Title Page Declaration and W ord Count Abstract Acknowledgements Table of Contents List of Figures Glossary Chapter 1 Introduction 1:1 Background and Rational to the Research 1:2 Research Question and Objectives 1:3 Overview of the Subsequent Chapters

P AGE 1 2 3 4 5 7 8 9 9 11 12

1:4 Conclusions

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Chapter 2 Literature Review 2:1 Theories Underpinning the Research 2:1:1 Stakeholder Accountability 2:1:2 Legitimacy Theory 2:1:3 Critical Theory 2:1:4 Motivations for Environmental Reporting 2:2 The Business Case 2:2:1 Financial Considerations 2:2:2 Risk 2:2:2:1 Environmental Risk 2:2:2:2 Reputation Risk 2:2:3 Competitive Advantage 2:3 Other Factors Relevant to the Research 2:3:1 Legislation 2:3:1:1 Operating and Financial Review/Extended Business Review 2:3:1:2 Combined Code on Corporate Governance 2:3:2 Environmental Management Systems, Frameworks and Awards. 2:4 Conclusions 2:5 Hypotheses Chapter 3: Methodology 3:1 Introduction 3:2 Research Philosophy 3:3 Method 3:3:1 Section 1 3:3:2 Section 2 3:4 Limitations of the Method Chapter 4: Findings and Analysis 4:1 Findings 4:1:1 Section 1 4:1:2 Section 2 4:2 Analysis 4:2:1 Section 1 4:2:2 Section 2 4:3 Testing of the Validity of the Hypotheses and the Research Question answered. 4:3:1 Hypothesis testing 4:3:2 The Research Question Answered Chapter 5 Conclusions 5:1 Limitations of the Research and Suggestions for Future Research

14 14 14 16 17 18 20 21 23 23 24 25 26 26 27 28 28 29 30 31 31 31 32 33 33 34 36 36 37 37 41 41 41 46 46 47 49 51

References Bibliography Appendix A - An overview of environmental reporting systems frameworks and awards. Appendix B - Questionnaire Appendix C - Spreadsheet of web search results Last Page

53 58 60 62 66 72

LIST OF FIGURES

Table 2:1 Impacts of different management approaches to environmental reporting. Table 4:1 W eb site reporting statistics Table 4:2 Summary of question 7 results Table 4:3 Summary of question 8 results Table 4:4 Summary of question 9 results

Glossar y

AIM LSE GRI SME DEFRA OFR EBR ACCA EMAS EMS ISO

Alternative Investment Market London Stock Exchange Global Reporting Initiative Small and Medium Sized Enterprises Department of Food, Rural Affairs and Agriculture Operating and Financial Review Enhanced Business Review Association of Chartered Certified Accountants Eco-Management and Audit Scheme Environmental management System International Organisation for Standardisation

CCCG CSR

Combined Code on Corporate Governance Corporate Social Responsibility

Chapter 1 Introduction 1:1 Background and rationale to the research The intention of this research is to investigate companies listed on the Alternative Investment Market (AIM) and find what will motivate them to produce environmental reports. This type of reporting is becoming increasingly common among larger companies but the trend does not appear to have carried over to their smaller cousins. A search of the Corporate Register (2006) showed a total of 513 UK companies produced standalone environmental or social reports; this is less than half the UK companies listed on the main index of the London Stock Exchange (LSE, 2006) so there is still a long way to go

before smaller companies feel the pressure to follow suit. However statistics on how many companies report this type of information do not tell anything about the quality of the reporting nor about how companies attempt to reduce their ecological footprint on the earth. (Britton and Gray, 2001) The pressures of globalisation and the need for more transparent internal governance procedures are seen by some as one of the drivers for environmental reporting. (GRI Guidelines, 2002) The need for organisations to be accountable to a range of stakeholders throughout the world when global business is perceived by many as an evil, and in the wake of the Enron and other major scandals, many companies are looking at new ways to provide that accountability and transparency. Non-government organisations are becoming increasingly powerful and companies which have traditionally been perceived as being less than environmentally friendly have recognised the benefit of adopting some of the environmental rhetoric (Norman and MacDonald, 2004) The AIM index was chosen as companies listed here are often fast growing and may enter the official list after two years trading on the AIM. This should ensure a more dynamic sample than a random selection of SMEs. Smaller companies were also chosen as the majority of most countries economies are comprised of these smaller organisations. (New Straits Times, 2003) The AIM index is for growing global companies and is less strictly regulated than the Official list. For this reason companies listed on this index are perceived as riskier, however for growth the index has the best record in the world and has consistently outperformed the FTSE 100 between 1999 and 2005. (LSE. 2006) One method of reducing risk is through environmental reporting so part of the project will be to investigate ways in which risk and shareholder/stakeholder expectations are interlinked. Although this is a global index, only UK companies will be investigated in the research. The current situation in the UK has no legal requirement to provide environmental reports to shareholders however many companies listed on the official list prepare environmental reports. The government has been seen to be in favour of environmental reporting with Environment Minister Elliot Morley actively promoting the voluntary production of environmental reports (DEFRA, 2006) and while the Operating and Financial Review (OFR) has been abandoned as legislative requirement all but small companies are required to prepare an Extended Business Review (EBR) within their directors report for periods

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commencing on or after 1 s t April 2005. (Kreiger, 2006) The EBR must contain non-financial key performance indicators concerning environmental matters. The government continues to seek voluntary reporting particularly through the adoption of environmental management systems such as ISO14001 or the DEFRA Guidelines. It may be that many AIM listed companies fall into the small company category so avoiding the necessity to prepare an EBR but those with foresight cannot deny that legislation is inevitable given the current level of public interest in environmental matters. Previous research has shown that there are several reasons for the preparation of these reports, including higher shareholder returns, lower costs through improved efficiency, mitigating risk and increased competitive advantage. (Toms, 2000, Bebbington et al, 2006, Porter and Van der Linde, 1995) Most current research has been carried out into the reporting practices of large, often, multi-national organisations with 71% of the UKs top 100 companies producing environmental reports in 2005, 49% in 2002, up from only 13% in 1993. (KPMG, 2005) However preliminary internet searches of AIM listed companies has revealed that there is little or no production of environmental information among these companies. There are several reasons why this may be so; perhaps companies perceive that the above average returns often associated with AIM listed companies negate the necessity to provide the additional environmental and social reports now produced as a norm by many larger companies. The International Organisation for Standardisation cite several reasons for the lack of environmental reporting or implementation of environmental management systems among small and medium sized enterprises, including a lack of knowledge or understanding of systems or denial that they have any environmental impact, resource constraints or a lack of incentive to implement systems (ISOa, 2006); while ACCA cite cost as a major deterrent especially for smaller organisations. (ACCA, 2004) These reasons will be investigated within this report. Of course some of the strongest proponents of environmental reporting are the major accounting and consulting firms who, by no coincidence, offer environmental reporting and auditing services to clients. (Norman and MacDonald, 2004) For this reason it may be viewed within companies that environmental reporting is something of the domain of accounting professionals and academia and not something to be concerned about in the real world. The perception of the

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relevance of the finance directors involvement in environmental reporting will be tested within the research. 1:2 Research question and objectives. The research question is W hat are the main motivations for AIM listed companies to adopt environmental reporting practices and do they differ from those adopted by larger companies? The objectives of the study are; To review the relevant literature in order to understand motivations and current practices for environmental reporting which will enable hypotheses to be formed and subsequently tested. To analyse the data collected and link the results to expectations gained through earlier research and writings. To answer the research question by either proving or disproving the hypotheses. To draw conclusions and make comment on the information obtained, highlighting any shortcomings in the research process and making suggestions for future research.

1:3 Overview of the subsequent chapters. Chapter 2 is the literature review which will examine the literature relevant to the subject. Although there is a paucity of literature concerning SMEs there is an abundance of research into larger organisations. Firstly theories underpinning the research are discussed to put into perspective the whole research question. The main purpose of the research is to examine the motivations for a company to commence environmental reporting and to determine whether the stage of development the company was at had any bearing on the level of environmental reporting

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undertaken or the potential drivers to introduce environmental reporting, as a proxy for the stage of development Maslows hierarchy of needs (Mullins, 2006) will be used to explain managerial behaviour. A range of drivers were chosen, to be ranked in importance by respondents to a questionnaire, which when the results were analysed should allow probabilistic statements to be made regarding the behaviour of the sample. By viewing current practice and managerial perceptions through this lens should allow insight to be gained into why companies do or do not prepare environmental information and whether the main drivers for companies at this level are different from those of larger companies. Secondly the business case for environmental reporting will be examined and discussed in the context of the SME. This discussion looks at both the financial considerations to be taken into account when implementing a new system and the potential impact of non-implementation. Next environmental and Reputational risks are discussed to highlight the possible benefit or detriment to be gained by a company. Finally in this section competitive advantage is discussed in order to determine how environmental reporting can be linked to overall strategy. This leads to a discussion of relevant legislation and environmental management systems as without a suitable system in place environmental reporting can be meaningless. (ACCA, 2004) Conclusions are drawn from the literature review and the hypotheses are developed in order to answer the research question. Chapter 3 is a discussion on methodology, outlining the research philosophy and the rationale behind the choice of methods adopted and then describing the methods employed in the research. The choice of methodology dictates the methods used in the research and appropriate choices will lead to sound intellectual reasoning and produce credible and robust conclusions. (Hussey and Hussey, 1997) Limitations of the method are then discussed to highlight any areas of shortcomings identified; this will allow recognition to be made of such in the final conclusions. Chapter 4 is the data analysis and findings where the results of the primary research and questionnaire survey will be presented and discussed. This leads to an appraisal of the validity of the hypotheses and their acceptance or rejection on the basis of the information obtained f rom the survey.

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Chapter 5 is a discussion of the conclusions drawn from the results and attempts to highlight any shortcomings in the methods employed and make suggestions as to the direction of future research in this area.

1:4 Conclusions This chapter has attempted to give an overview of the current state of environmental reporting in the UK looking at the number of companies disclosing information rather than an appraisal of the quality of reporting. It has described the reasons behind the growing trend for increased disclosure and interest in governance matters after corporate scandal and outlined reasons why companies can find this increased disclosure attractive. Governments part has been discussed to show that although not inclined at present to pass legislation it may be significant in future the level of concern expressed by ministers. Reasons for non-disclosure were identified and will be investigated in greater depth within the research to examine whether these reasons vary between large companies and the smaller AIM listed companies. Although this research is on environmental reporting, literature examined also includes that of sustainability, social reporting and triple bottom line as many of the issues follow a common theme of accountability and transparency.

Chapter 2 Literature Review There is little previous research on smaller companies however research carried out by Jackson et al. (2000) found that in companies outside of the FTSE300 there was overwhelming disinterest in the subject and a major reason for not reporting was that the information was not required by shareholders. The literature review shall examine current theories used to explain motivations for environmental reporting linking these to the business case for environmental reporting. This leads to a discussion of the current legislation and possible future developments and finally a brief discussion of the available environmental management systems and frameworks which are

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a precursor to full reporting and a brief discussion of the awards made to companies excelling in environmental reporting. 2:1. Theories underpinning the research The main two theories used to explain the rise in environmental accounting are stakeholder and legitimacy theory, critical theory will also be examined as it may assist in providing an explanation for the lack of environmental reporting carried out by the majority of UK companies. 2:1:1 Stakeholder Accountability Stakeholders were defined by Freeman (in Schaltegger and Burritt 2000:31) as any individual or group having an interest in the company because they can affect or be affected by the companys activities. This definition may include shareholders, employees, customers, suppliers, communities or other interest group however Sternberg (2004) contends that this gives too broad a scope to the definition and could even be extended to terrorists and sea creatures; she does also point out that stakeholders are not eternal (p55) and so reminding companies that they need to have a constant awareness of changing stakeholder relationships. Toms (2000) says that the environment is a stakeholder and if that definition is given to solicit respect for the environment then it could be a powerful stakeholder. Much recent stakeholder literature has stressed the importance of a wide group of stakeholders to an organisations continued success (Deegan 2000, Gray, 2003, Guthrie and Parker, 1989) and the trend has moved away from the shareholder model where the only stakeholders who the company is accountable to are the shareholders. Although Sternberg (2004) still advocates the shareholder model as the only acceptable model because the function of an organisation is to fulfil its legitimately constituted purpose or objectives (p31) and is under no obligation to other stakeholders; there is little contemporary support for this ideal. Shareholders are still seen as the most important stakeholder group and if a company has shareholders that actively use voice there is greater evidence of voluntary environmental disclosure. Since the 1970s, when institutional shareholders took over from individuals, as majority shareholders levels of disclosure have increased

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rapidly. Research from the USA could explain this phenomenon, finding that as shareholding became more diverse, so pressure on managers to disclose social responsibility matters increased. (Toms, 2002) Toms (2002) own UK research corroborated this, finding that with dispersed institutional shareholding the level of environmental reporting increased. It may be that AIM listed companies, as new entries to the stock market, have a less diverse shareholding base and therefore do not come under the same pressures to disclose environmental information as larger more diversely held companies do. To accept stakeholder theory, Freidmans (1970) assertions that the purpose of a business is to create wealth for its beneficial owners must be discarded. This view has gathered greater acceptance in recent years (Deegan, 2002, Owen 2003, ODwyer et al. 2005) as the importance of a wider group of stakeholders to the company has become more widely recognised. The importance of environmental reporting and performance to a wide range of stakeholders becomes more apparent as the human impact on the changing environment and issues such as global warming become evident. (Scaltegger and Burrit, 2000) ACCA (2004) however have found that most reporting lacks sufficient stakeholder dialogue and leads to company focused reporting rather than fulfilling the needs of outside stakeholders. Jackson et al (2000) found that reporting was of greatest usefulness to local communities as key stakeholders in company eyes, but Henriques and Sadorsky (1999) further qualified this by saying that companies which operate at different levels of environmental awareness will have different perceptions of the importance of key stakeholders and this managerial perception is critical to the level of importance attached to particular stakeholder groups while ODwyer et al (2005) found that the management perceived stakeholder interest in environmental and social matters was very low in comparison to actual interest. 2:1:2 Legitimac y Theor y Businesses may seek to gain legitimacy through environmental reporting as suggested by Deegan (2000, 2002). He posits that an organisation is granted a right to operate by the public, they grant a social contract and through environmental reporting seeks to legitimise its operations and therefore acquire or strengthen this right in the eyes of its stakeholders. However there cannot be a definitive definition of how companies seek

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to legitimise operations as what is perceived as acceptable to one society may not be so in another, therefore the conditions of the social contract can be constantly changing as the needs and perceptions of stakeholders change. If a companys activities are contrary to what is deemed acceptable they may try to re-establish the social contract through additional (environmental) disclosure. Legitimacy theory cannot be accepted if managerial motive to report is due to their belief that they do so as their duty of accountability and responsibility to stakeholders, the theory only holds true if the motive is to gain or retain legitimacy and is used as a reputation management tool. (Deegan, 2002) W hile stakeholder theory may be seen as proactive by initiating dialogue, legitimacy theory can be viewed as reactive, in that disclosure is a result of external environmental factors (Guthrie and Parker, 1989) and increased disclosure has been found among companies which have previously been prosecuted for environmental infringements. (Frost and W ilmshurst, 2000) Companies may also use voluntary reporting as a means to legitimise their activities and thereby defer the need for government intervention with the introduction of further legislation. (Frost and W ilmshurst, 2000, Clarke and GibsonSweet, 1999) If legislation is likely to restrict the way a company does business or has financial implications they may use legitimising tactics, such as increased disclosure, to preempt government intervention. W hile legitimacy theory remains the most commonly accepted in current research it is not universally accepted as the main determinant of environmental reporting: Guthrie and Parker (1989) found no evidence in a case study to suggest the theory applied in their case and Frost and W ilmshurst (2000) found only limited support for legitimacy theory being a motive but state that if companies fail to legitimise their activities this may lead government to legislate to ensure companies comply. 2:1:3 Critical Theor y Critical theory developed, nearing the end of the last century, in the philosophical arena to appraise the social order in capitalist countries to inform debate on the class struggle. Now commonly used in accounting research to take an objective perspective it seeks to analyse the objective through subjective interpretation. (Ryan et al 2002) In critical theory, the commonly held belief that accounting systems have developed to produce unbiased and neutral

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reporting is refuted and the perspective of accounting as being for the benefit of certain parties permitting only them to maintain power at the expense of others in society. (Deegan, 2000) Environmental accounting research has frequently been a topic examined under this critical lens as researchers have attempted to highlight the deficiencies of traditional accounting to provide stakeholders with useful reports. Many critical theorists are opposed to aspects of the capitalist culture which predominates in todays world and that as the power lies with large organisations, governments and regulatory bodies then the status quo will be maintained as those bodies may have a vested interest in maintaining the current system. (Deegan, 2000,) Therefore under critical theory it may be found that there is resistance to implementing new systems and ways of accounting to be found among those who have not already commenced environmental reporting due to other external or internal pressures and that the concern of accountants with financial matters being the only ones of importance to a company will result in environmental exploitation and degradation. (Owen, 2003) 2:1.4 Motivations for environmental reporting In order to ascertain the motivation for environmental reporting the underlying concept of motivation must first be analysed. This is defined in individuals by Mullins (2006. p 184) as .some driving force within individuals by which they attempt to achieve some goal in order to fulfil some need or expectation. This definition can also be applied to organisations as they comprise individuals and therefore the operation of an organisation relies on the collective aspirations and needs of those individuals. Maslows hierarchy of needs for example says that once an individuals basic needs, food, shelter, sleep etc. are satisfied then their needs move up the hierarchy to the need for security, then to social acceptance needs, then to ego needs which can include reputation and recognition and finally to the need to reach their full potential. (Mullins, 2006) Embedded in this theory is the notion that once the basic needs are fulfilled the individual will endeavour to reach the higher levels and the basic needs are no longer a motivational force as the new needs fulfil this purpose. (Brooks, 2003)

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The most basic needs, that of food and shelter must be obtained at any cost, taken in the context of an organisation it may therefore be hypothesised that when in its infancy an organisation is focused on survival and becoming successful at what it does (i.e. trading and accounting for that business in as straightforward a manner as possible) and therefore concentrates all its effort on these goals. If it is successful at doing this then the aspirations of the organisation may change, possibly to growth, either organically or through acquisitions, and as this occurs then the environment in which it operates also changes and to remain competitive it has to adapt to that changed environment. Porter and Van der Linde (1995) claim that through environmental reporting companies can gain a competitive advantage but the trigger point to commence environmental reporting has not been defined. Freedman and Stagliano (1992, in W ilmshurst and Frost, 2000) state there is no single motivator for external reporting which comes as a result of managerial motivations and attitudes. Using Maslow to try to analyse this point may be impossible as he states that the hierarchy is not necessarily in a fixed order and also that the satisfaction level necessary to move to the next level varies from individual to individual (Mullins, 2006) and some are happy to remain at a particular level lacking the motivation to attain higher. (Brooks, 2003) Further, the theory was intended for use on the individual not organisations. Research by Roberts in 1990 into trends in social reporting found that the increasing unemployment in the previous decade had led to a reduction in social reporting as the economic aspects of business grew to be of greater importance than the social. (Owen, 2003) found that the amount of social disclosure increased with the size of the company while Campbell and Slack (2006) found that size and proximity to end user were relative to the amount of charitable giving an organisation made. This would suggest that Maslows hierarchy could be a suitable framework for evaluating the evolutionary stages of a company. Attempts at classification have also been made in order to describe the degree of proactivity companies display in their environmental management, again describing evolutionary strategies a company might take as it moves from the beginner level to a proactive approach (Henriques and Sadorsky, 1999)but this research does not explore the triggers for these different classifications beyond management hubris. Most research carried out on major companies points to increasing levels of disclosure citing a number of reasons for

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disclosure. Khanna and Anton, (2002) state that companies prepare different types of reports depending on whether their main motive is for legislative reasons or competitive advantage reasons. The reports of companies concentrating on the legalistic implications will tend to be formally expressed practices, such as specialized environmental staff, environmental policy and audit and liability insurance while companies focusing on competitive advantage will place more emphasis on training and rewarding employees and total quality management which will continuously strive to improve environmental performance. AIM listed companies tend to be fast growing and dynamic newcomers to the market and will need to maintain competitive advantage in order to continue their growth strategy and therefore may be expected to prefer the competitive advantage types of reporting. Previous research can be categorised by three main groups; the business case, stakeholder accountability and critical theory. (Brown and Fraser, 2006) These categories will be discussed in more depth in relation to the research being carried out. 2:2. The Business Case Supporters of the business case claim that environmental reporting should be a key strategic tool to build value in the business (Porter and Van der Linde, 1995) and not something to be offset against profits with the motive for reporting lying elsewhere. (Brown and Fraser, 2006) Gray (2003) takes the definition of the business case to its lowest level stating it as will it make us or stop us losing money? (2) The business case will be examined under the headings of; Financial considerations; are an important aspect, and relevant to, organisations of all descriptions but perhaps more so to companies on the AIM index which are often in their early years of trading and making a trading loss. Risk: the risk of causing environmental damage and the associated costs involved or reputational risk which needs to be managed and encompasses environmental risk and can have a significant impact on revenues and expenses. It can also impact on access to capital from investors and banks. Competitive advantage: Companies, especially those in highly competitive industries, need to maintain a competitive

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advantage and how environmental reporting can assist in this will be examined. These three factors can be summarised (see table 2:1) using three different management approaches, compliance, ecoefficiency and new markets, against each type is shown the effect of implementation on performance and profitability and in the third column is indicated which of the business case indicators are most affected by this style of management.

Table 2:1 Impacts of different management approaches to environmental reporting. Management Approach Compliance Performance and Profitability Impact Legislative compliance to prevent costs of non-compliance. Reducing environmental and Reputational risk. Business case indicators Financial Risk

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Eco-efficiency

Achieving cost efficiencies through process improvement. Understanding life-cycle costs. New Markets Improving market share through product changes Engaging stakeholders to manage reputation and maintain credibility Defining organisational wide values and strategies to ensure consistent standards and risk management. Adapted from Cottrell and Rankin, 2000. p3

Financial Competitive advantage

Financial Risk Competitive advantage

2:2:1 Financial Considerations The most basic method for companies to benefit financially through the implementation of environmental systems is through cost savings such as due to less energy or water usage when the environment and the company both benefit. (Gray, 2003) Costs will be incurred by all companies to meet legislative requirements, but these costs will be less than those incurred should a breach of regulation occur and be discovered. (Cottrell and Langton. 2000) However an organisation more committed to environmental issue will incur greater costs when implementing an environmental management system, costs will be incurred in replacing plant and equipment that has better environmental credentials. This process improvement could lead to cost savings so offsetting the initial costs (Cottrell and Langton, 2000) but the initial cost could be seen by companies as a disincentive to report and smaller companies could see it as a barrier if they have insufficient funds. However much of the information is already collected within companies so initial costs need not be exorbitant and the management phrase of if you cant measure it, you cant manage it is appropriate in this case and is simply

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a move away from the traditional focus on financial performance. (Norman and MacDonald, 2004) Research by Toms (2000) concluded that through environmental reporting companies created value both through increased profits and increased share prices. The recent explosion in the number of ethical investment funds lends weight to the claim that share prices can increase when environmental matters are reported. (Robson, 2006) Most main stock exchanges now have sustainability indices; e.g. the Dow Jones Sustainability Index and the FTSE4Good Index however Toms (2001, 2002) found that investment professional attached little importance to certified environmental management schemes placing more weight on the quality of reporting, a view backed by Robson (2006) who found that benefits to the bottom line depended on the manner in which it was recorded, while Alexander and Buchholtz (1978) found no discernible difference risk adjusted rates of return when investigating social responsibility reporting and share price. Neither do these funds accept companies in unethical industries e.g. armaments or tobacco and so even should such companies have impeccable environmental credentials would be barred from these funds on the grounds of their industry. (Cowton, 2004) The costs to business for permitting environmental degradation can be substantial if legislation is broken with large fines and clean-up costs and Schaltegger and Burrit (2000) suggest that companies are adopting environmental reporting procedures, not through consideration for the environment, but to avert the costs incurred should non-compliance occur. Companies can benefit from a reduced cost of capital and one factor considered in the calculation of interest which is included in cost of capital calculations is risk, including environmental risk, (Schaltegger and Burritt, 2000, Jones, 2000 ) so prudent environmental management can reduce borrowing costs and therefore increase return on capital. It is possible that quality environmental reporting is not significant to enhanced financial performance and that the performance is a result of superior management overall or that there are other barriers to competition. (Toms, 2001) 2:2:2 Risk In the context of this research risk can be subdivided into two categories; environmental risk and reputational risk. The two

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are linked in that if a company chooses to ignore the environmental aspect it can impact on reputation which can lead to degradation of profits and even ultimately to withdrawal of the perceived licence to operate, bestowed on a company by the public.(Deegan, 2000) Risk reporting in the annual report, as part of the business review, is seen to benefit companies through the provision of forward looking reporting at a time when acceptance of the provision only of historical information increasingly comes under criticism, reduction in cost of capital, enhancing risk management and improved accountability to shareholders and investors. (Elliot and Elliot, 2005) 2:2:2:1 Environmental risk As investing in the AIM index may be riskier than investing in the main indices then it should follow that there would be increased disclosure among companies in the AIM index. However AIM listed companies are not bound under their listing rules to make risk disclosure under the Combined Code on Corporate Governance so this may be an internal function only. For investment decisions investors and banks will take into consideration environmental risk when making investment decisions, (Gray, 2003) banks may have the chance to review environmental risk when they are approached by a company requiring finance but investors will generally not have this luxury. Research by Toms (2002) found that there was a positive correlation of risk to reputation and by reducing risk to increase reputation the cost of capital is reduced as investors require a lower rate of return. The implementation of an environmental management system can be seen as a positive signal in the management of risk, providing insurers and government with evidence of assessment and management of environmental risk. (EMAS, 2003) 2:2:2:2 Reputation risk Bebbington et al (2006) suggest that reputation consists of five elements which are; financial, management quality, social and environmental performance, quality of employees and quality of products; poor performance in any of these elements can lead to loss of reputation. Toms (2002) found that disclosure of environmental reports and the monitoring and disclosure of environmental policies made a significant contribution to

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environmental reputation which was unaffected by financial performance. The literature suggests that companies may make environmental disclosure as part of their reputation risk management (Bebbington et al. 2006, Clarke and Gibson Sweet, 1999) and that good environmental reputation is an intangible asset (Toms 2001); Friedman and Miles (2001) include this as a strong reason for the business case and the strengthening of corporate governance to provide greater transparency and accountability. Used as a public relations exercise it is unlikely to be sustainable and only through the development of a sustainable model, taking into account key stakeholders, can this type of risk be managed. (Robson, 2006) Reputation as an intangible asset arises out of past performance of a company, whether it has provided good service or reliable products or is well known for its ethical stance, and is built out of the perceptions of a wide group of stakeholders. (Bebbington et al, 2006) As reputation is built on perceptions it is highly subjective and as these perceptions are those of a wide group of stakeholders it becomes a highly complex, and possibly very fragile, commodity in todays highly competitive marketplace. As reputation is not static and built on perceptions it is extremely difficult to manage and newer firms will want to build a solid reputation, if they report superficial, unsubstantiated environmental reports which may later be refuted they may choose to ignore this area of reporting until compelled by external factors at a later date. Only quantifiable, verifiable information will contribute to the building of sustainable reputation. (Toms, 2002) At face value reputation risk management and legitimacy theory have many common characteristics but Bebbington et al (2006) discuss the differences, arguing that while legitimacy theory is based on societys norms and values reputation is linked to the comparison of like organisations. 2:2:3 Competitive Advantage W agner and Schaltegger, (2003) question whether a business becomes competitive and then reports on sustainability or whether it is through this reporting that the business gains competitive advantage. However Porter and Van Der Lynde (1995) claim that the competitive advantage is gained, not through the reporting itself but through the innovation and

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development of new technologies required to combat environmental damage. This latter explanation is the logical explanation for gains in competitive advantage as reporting in itself is unlikely to create advantage; reporting is unlikely to create advantage unless there is a comprehensive programme of improvement and monitoring with the co-operation and involvement of employees. Toms (2001) takes this further by suggesting that the creation of a good environmental reputation, through publicising their environmental reporting, is in effect creating an intangible asset and the improved reputation can be a competitive advantage. Competitive advantage is an advantage that is not easy to imitate (Johnson and Scholes, 2002) and as investing in environmental management can be costly would be difficult for competitors unwilling to make the same level of commitment to imitate. (Toms 2001) This cost could though set companies at a competitive disadvantage (Alexander and Buchholz, 1978) unless they are able to utilise the expenditure in productive manner. Large companies can exploit competitive advantage through economies of scale but smaller companies would benefit more through developing intangible assets, such as reputation, which are more difficult to imitate. (Toms, 2002) Having the best possible management can also be a means of gaining competitive advantage and Robson (2006) found that 65% of accountancy students would look at companies CSR policy when looking for a job with many making it their main priority. Although this is not exclusively environmental it may be unwise not to take heed that younger generations take good environmental and social responsibility as an accepted norm. Competitive advantage can also be lost due to imitation by competitors, if there is a likelihood of this happening then it makes sense for management to wish to keep the source of the advantage secret. Therefore the call for extensive reporting and transparency is in conflict and there is a paucity of guidance in the literature on this issue. (Norman and MacDonald, 2004) 2:3. Other Factors relevant to the Study 2:3:1 Legislation This section refers only to regulation of companies governance with regard to requirements for reporting environmental matters and not to environmental legislation itself as this subject has too broad a scope f or this piece.

26

Voluntary environmental reporting can be seen as a way to avoid governments imposing restrictive legislation. (Frost and W ilmshurst, 2000, Brown and Fraser, 2006) Current reporting legislation in the UK is only applicable to companies listed on the Official List and guidance is to be found in the Combined Code on Corporate Governance, further guidance would have been provided had the Operating and Financial Review been implemented however this was abandoned by the government before coming into force this year. Many companies had already started to voluntarily produce a review and it is yet to be seen whether they will continue this practice. Company law requires no environmental disclosure, but the power of shareholders to require a company to provide this information should not be overlooked. In 1998 Shell was the first company to be forced to address environmental issues after shareholders lodged a resolution to address what they saw as inadequate policy and reporting practices. Although the resolution was unsuccessful, Shell did re-evaluate their current policies. (Friedman and Miles, 2001) Self regulation is seen by some (Ashby et al, 2004) as another alternative to government regulation, with the companys image benefiting from public disclosure, and that if the benefits accrued from voluntary compliance exceed costs no regulation issue exists but this is generally unlikely to occur. It can also be seen through the legitimacy lens as averting government regulation through voluntary compliance. Government regulation is advocated by many writers (Deegan, 2000, Medawar, 1979, Inman, 2004) as a means to achieve accountability and transparency and that companies report voluntarily to defer government intervention. Voluntary action is viewed as less costly than legislative compliance. (Ashby et al, 2004) A problem seen with self regulation is that of freeriding by companies who disregard voluntary codes and behave in an inappropriate manner in the belief that compliance by the majority will mask their transgressions. (Ashby et al, 2004) Although not specifically environmental regulation the provision of directors liability brings individual responsibility (W ilmshurst and Frost, 2000) Government, however, must be careful when considering what could be seen as burdensome legislation in that the imposition of such in a climate of general disinterest will only lead to massive levels of non-compliance. (Jackson et al, 2000) Outside the UK several countries do have mandatory environmental reporting including Denmark, Netherlands, Sweden, France, Australia and Korea and the European Union

27

has prepared the Commission Recommendation on the Recognition, Measurement and Disclosure of Environmental Issues in the Annual Accounts and Annual Reports of Companies (2001) which calls for closer integration of financial and environmental reporting. (Gray, 2003) All of which may indicate that the UK will eventually follow suit possibly through EU directive if the UK government does not take the initiative. 2:3:1:1 Operating and Financial Review /Extended Business Review The reporting requirements of the Operating and Financial Review, scrapped by the government in November 2005, has been superseded by the Extended Business Review although companies still have the option of reporting voluntarily under the OFR standard.(Deloitte, 2006) Section 29 of the OFR would have required listed companies to disclose environmental matters (including the impact of the business of the entity on the environment.) The report would have included environmental policies and how successful implementation had been. If disclosure was not made this must be stated. (ASB 2005, paras. 29, 30) The standard also states that it should not be a replacement vehicle for reporting to other stakeholders on matters such as environment or corporate social responsibility. However there was also the proviso that directors need not disclose anything that could be detrimental to the business. This appears to absolve directors from reporting any adverse environmental impacts but unfortunately due to the OFR requirement being scrapped by the government prior to implementation remains untested. However with Friends of the Earth took legal action against the government due to lack of consultation and forced the government into a review in February 2006. (W oods, 2006) This reversal of government position is not the end of their desire for companies to report on their environmental impact, environment minister Elliot Morley has urged companies of all sizes, not just those required to fulfil legal obligations, to implement the new DEFRA guidelines. (DEFRA, 2006) The successor to the OFR is the Extended Business Review and has been welcomed by the Department for Environment, Food and Rural Affairs (DEFRA, 2006) as the guidelines address significant environmental impacts and view it as an opportunity for businesses to measure, manage and report environmental performance as a means to save costs, enhance reputation and reduce risk. (BatE, 2006) 2:3:1:2 Combined Code on Corporate Governance

28

The Code incorporates the Turnbull Report and Review of 2005 to require disclosure of material non-financial matters; this includes but is not exclusive to any potential environmental matters; however this is left to the discretion of the directors to decide what is or is not material. The main issue is of risk and internal control which should be reviewed on an ongoing basis and disclosure made when there is seen to be any relevant issues. As the listing requirements for AIM listed companies do not require compliance with the Combined Code it is possibly a test of a companys integrity and willingness to seek transparency should it voluntarily comply with the requirements of the code. 2:3:2 Environmental Management S ystems, Framew orks and Aw ards. In order for a company to effectively manage its environmental reporting it needs to implement an effective environmental management system. (New Straits Times, 2003) As an argument in favour of the business case for environmental reporting the International Organisation for Standardisation (ISO) says: There is mounting evidence that companies which manage not only the standard economic factors but also the environmental and social factors affecting their business show financial performance superior to those which fail to manage all three. (ISOb. 2006) There are several EMSS available to companies and the merits of each are examined at appendix A. The purpose of this, linked to the research questionnaire, is to determine whether there appears to be a preferred method amongst AIM listed companies and if so what merits or otherwise can be attached to the chosen systems. One criticism made of the compliance approach as opposed to the legislative approach to environmental reporting is that the commitment to reduce emissions etc. allows companies to set low easily achievable targets of little benefit to the environment. (Elliot and Elliot, 2005) 2:4 Conclusions Environmental reporting has increased considerably in recent years among larger companies but appears to lack direction and focus with companies reporting on a variety of indicators

29

but there is a lack of comparability between companies. There is little research into smaller companies and the stage of company growth at which environmental reporting becomes a strategic tool, an issue this piece of research seeks to address. W hat research there is indicates a lack of interest in the subject. Companies may incur costs when complying with legislation but there is potential to make significant cost savings through more progressive environmental management. There is also the possibility of improved shareholder value through the creation of an intangible asset in the form of environmental reputation Risk is an important factor in environmental management as the effect of underestimating risk can have serious financial and ecological consequences. Reputation risk management and legitimacy theory have several common themes including the empowerment of stakeholders to have influence over managerial behaviour from which it may be concluded that companies which ignore their key stakeholders are ignoring the business case for improved accountability and transparency. Companies may underestimate the power of key stakeholders with managerial perceptions leading to a lack of reporting, a situation which may only be revised if the company is seen, by powerful key stakeholders, to have transgressed their moral code and apply pressure on management to change their procedures. Although many companies report on environmental matters in order to pre-empt shareholder/stakeholder dissatisfaction it has not been conclusively proven that this legitimising tactic really works. Legislation has, so far, failed to compel companies to give environmental matters serious consideration only paying lip service to risk considerations and as only companies listed on the main index are bound to follow the Combined Code this leaves reporting of the majority of the countries organisations at the discretion of management. Although it cannot be predicted at present, as public opinion shifts more strongly in favour of sustainability, it may be in the not too distant future that environmental reporting will become required of all organisations. Regardless of whether a company provides quality environmental information or not good management is imperative and no conclusive link has been established to indicate whether one precedes the other.

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2:5 Hypotheses H0 = That companies need to attain certain levels of development before implementing environmental policies and reporting. This hypothesis will be tested using Maslows hierarchy of needs as the framework for analysis. H1 = That motivation for AIM listed companies w ill be the same as those identified w ithin the literature for larger organisations. The literature review will provide the basis for testing this hypothesis against the results obtained from the questionnaire survey. H2 = A lack of understanding or implementation of the key concepts for the business case w ill lead to low rates of environmental disclosure. This hypothesis will be tested by rating the key issues of the business case to find what level of recognition exists among AIM index companies.

Chapter 3: Methodology 3:1 Introduction. The role of methodology in research is to define the bounds within which the nature of reality is assessed. W hen defining these bounds assumptions are made and interpretations made which will in turn order the nature of the research method. Accounting research falls under the remit of social science as it investigates social issues and not that of the natural world. (Ryan et al 2002)

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3:2 Research Philosophy The research method chosen is empirical and positivist in nature in order to test attitudes and perceptions and link these results to the current theory underpinning the phenomena of environmental reporting. It seeks objective truth which will be achieved through primary research in the form of a questionnaire. Had the research been interview based a phenomenological viewpoint would have more appropriate as the more in depth answers provided would have permitted a study of the behaviour displayed by the participants. There will be an element of phenomenology underpinning the quantitative methods used in the final analysis as there are open ended questions included in the questionnaire. This allows for some methodological triangulation to take place and lends more depth and richness to the final analysis. It may also allow greater validity and reliability than the use of a single method. (Hussey and Hussey, 1997) This piece of work is deductive and quantitative in nature as it sets out to test the theories used to explain environmental reporting. Relevant theory sets the bounds for the literature review and from that the hypotheses developed. There is no attempt explain or predict the outcome of the research or to develop new theories as there would be with inductive research. Absolute objectiveness is not possible but this method does provide a transparency not possible with a qualitative piece. The deductive method is most appropriate to this research as no new theory is being produced, existing theory, previously applied to a different type of organisation, is being tested in the context of the AIM listed companies. Objectivity cannot be absolute as perceptions and opinions are being sought, and personal biases of the respondents are unknown, and therefore some measure of subjectivity is inevitable. Using deductive reasoning conclusions are drawn through logical reasoning but even when the process of logical reasoning is correct what actually occurs in reality may not be the same. For example when Miller and Modigliani developed their theory on dividend policy and the irrelevance of dividends it was theoretically correct but in practice the perfect markets and zero taxation they used for the model do not exist and therefore the model was worthless. It did however lead to much further research into the subject with subsequent researchers supporting the theory. (W atson and Head, 2004) Much critical accounting research is objective but undergoes subjective interpretation and seeks to change contemporary reality, as this piece of work is a study of existing practice it is

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objective, accepting existing structures and seeking to explain actions. (Ryan et al. 2002) 3:3 Method An initial web search was carried out on a selection of randomly chosen AIM listed companies to obtain secondary data to assist in the development of the questionnaire. Although the companies were randomly chosen a balance of different industries and companies with a higher public profile were selected, no financial services companies were used due to the differing regulation of pension providers. This search was to see to what extent companies provided environmental information on their web sites and if they had annual reports on line, to what extent environmental matters were reported. It was also recorded whether or not they made reference to corporate governance matters, reporting in accordance with the combined code and then to compile a database to be used in contacting the companies by postal questionnaire to explore further attitudes and practices in environmental reporting. The postal questionnaire (Appendix B) was used in order to collect primary data not available elsewhere. It was a descriptive survey intended to test attitudes and beliefs and discover the views of respondents on environmental matters. (Hussey and Hussey, 1997) A weakness of this type of data collection is the typically low response rate, being around 10%. (Robson et al 2005) As only 37 questionnaires were sent out, due to time and financial considerations, it was not expected to receive a statistically significant number of replies but useful information may nevertheless be compiled. A further weakness is that respondents may exaggerate or undervalue certain responses. (Ticehurst and Veal, 1999) The questionnaire was compiled with the aim of understanding the motives and drivers for environmental reporting and to attempt to see if there was any difference between them and those reported in studies on larger companies. It consisted two sections; section one was to discover the current level of environmental reporting and activity within companies and section two to understand the drivers for environmental reporting with additional space for respondents to add any information they thought relevant to the debate. This was intended to broaden the scope of answers available to respondents which were otherwise limited to the constraints of closed questions and Likert scales. It was addressed to Financial Director level in order to investigate whether company boards take environmental considerations into account when devising their business strategy and although these were the opinions of one person within an

33

organisation, they were of a senior enough standing to be seen as representative of the companys position. Respondents were requested to supply their position on the questionnaire to monitor their level of standing within the company. The introduction to the questionnaire explained a little about this project and gave brief background information on the topic. It contained assurance of confidentiality to all respondents, that no names or identifying details would be used in the final report and a statement that the assumption was made that all respondents, through the act of completing and returning the form, were satisfied that they had no ethical concerns. Respondents were also given the contact details for the author should they wish to discuss the project further. All respondents were asked to give their name, company name and position in the company. They were also given the opportunity to request a copy of the completed report. It was not felt necessary to collect further personal information such as age or salary as these would lend little extra to the final report. 3:3:1 Section 1. The aim of this section was to discover the current level of environmental reporting and activity within companies. There were five questions in this section devised to find whether companies already carried out any environmental reporting or other types of non-financial reporting and whether any environmental management system was in place. It was also to discover if any companies using environmental reporting used it as a strategic tool through publication possibly in order to either lower perceived risk or raise reputation. Although the initial web search had revealed little in the way of environmental reporting it was felt important to clarif y what companies were presently doing as there may have been internal reports not available to the public. 3:3:2 Section 2. The aim of this section was to attempt to understand the main drivers for environmental reporting. Comprising of four questions and space for comment, three of the questions used Likert scales to measure the perceived level of importance of a number of statements. The first question was designed to test attitudes and beliefs of respondents The Likert scale questions were scaled from one to five with one being the most important and five the least important. The

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questions and subsequent statements to be scaled drew on research and studies by KPMG, (2005) Bebbington et al, (2006) W ilmshurst and Frost, (2000) and were an attempt to discover the main drivers for companies to implement environmental reporting and environmental management systems particularly if they do not already do so. The questionnaire was then piloted on peers and final adjustments made before being mailed, with a reply envelope, to potential respondents. On receipt of completed questionnaires they were coded and input into excel for further analysis. No coding was applied to the open ended questions as there were so few comments that individual analysis was possible. 3:4 Limitations of the Method Positivist research is criticised by those preferring an interpretivist methodology on philosophical premises, not because the methodology itself is flawed. (Ryan et al, 2002) The shortcoming of this piece of research is that a relatively small sample is being tested and therefore any conclusions drawn may not be indicative of the behaviour of the population as a whole. Also the likelihood of a response is increased when respondents have strong feelings, either positive or negative, about the subject. Therefore false results may be obtained depending on the individual respondents personally held beliefs. Although the research was positivist and therefore objective in nature the greatest drawback is that human nature cannot be scientifically accounted for in the analysis. Personally held views and perceptions are being tested and so can only provide a subjective view. So although the analysed results may be highly reliable, the validity may be called into question. (Hussey and Hussey 1997) The choice of companies for the survey may also lead to bias occurring as it was unknown whether the chosen companies were representative of the population as a whole and therefore unexpected bias may occur in the results. This bias may also be increased as even were the sample unbiased those who chose to respond may not be. (Hussey and Hussey, 1997)

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Chapter 4 Findings and anal ysis 4:1 Findings The initial web search was used to compile a spreadsheet, (Appendix C) providing information on the 37 chosen companies including contact details, notes on environmental information provided on their web sites, whether they produced an environmental policy and whether they complied with the requirements of the combined code on corporate governance. The results are tabulated below in table 4:1. Table 4:1 W eb site reporting statistics

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Environmental Policy 8%

In accordance with CCCG or other recognised standard 57%

Any mention of environmental matters. 43%

An in depth content analysis of the 43% of companies making mention of environmental matters was not possible due to time constraints but the level of information provided ranged from an environmental policy statement and some discussion of environmental impact of the business, to legal compliance statements down to statements such as the company displayed a "responsible attitude towards environment." 57% of companies web sites made no mention of environmental matters. Although companies on the AIM index need not comply with the Combined Code on Corporate Governance many of them state in their annual reports that they comply where appropriate for an organisation of their size. 57% of company web sites found stated that the company applied the principles of the Combined Code where applicable to AIM listed companies. The combined code requires that companies disclose any material risk; no such disclosures were discovered in the annual reports of those companies that provided annual report information, however nowhere was it stated what was or was not appropriate. Expectations of not receiving a high return of questionnaires were fully lived up to with only 7 responses from 37 mailings; this was an 18.92% reply rate so is in fact greater than the average response rate for postal questionnaires. However due to the low response rate it would be inappropriate to carry out certain statistical tests as the results would not be statistically significant. Instead the results were analysed using mean and standard deviation to identif y trends in the thoughts of those responding. 4:1:2 Section 1 Question 1 asked Do you currently provide any form of financial reporting on the economic impact of environmental matters? One company provides this information (14%) but does not make this information available to the public. (Q2) Question 3 asked if an EMS was in operation and if so which one? 57% of respondents said they did have a system in place but of those replies 29% delegate responsibility to subsidiary level and it is unknown whether all subsidiaries operate such a

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system. Of those that do operate an EMS all use ISO14001; reasons for this may include the higher public profile of ISO standards particularly among industries in which ISO accreditation in other areas in standard or it could simply be that the on-line information provided by the International Organisation for Standardisation is more easily understandable than that of EMAS or GRI and could support the claim that one reason for not reporting is lack of understanding of EMSs. Question 4 asked whether any other type of non-financial reporting was carried out. Only one company (14%) responded positively, stating this was a corporate governance report. This is not a true refection of non-financial reporting as other respondent companies provide corporate governance statements within their annual reports and the intention here was to see if any provided any form of social reporting, however the questionnaire did not give a list of options and left it open-ended as to what was commented on. Question 5 asked whether the company had ever undergone an environmental audit. The response was the same as for question 4 which indicates that as part of their ISO14001 procedures environmental audit is included. 4:1:3 Section 2 Question 6 asked if the respondent believes that the accountant has a role in the preparation of environmental reports. The response rate here was an encouraging 71%. Space for comments was provided at this point; comments that were made include Evaluate financial impact/integrate report to other reports and published documents. If it affects shareholder judgement/share price. If there is a cost implication Where required, as used in disciplines of data collection and reporting. Interestingly all of those providing comment believe that the accountant does have a role to play in the preparation of environmental reports, those who had disagreed were unable to provide comment to back up this statement.

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The final three questions were on a five point Likert scale. A score of 1 being the most important and five the least important. i.e. the lower the score, the greater the perceived importance. Questions 8 and 9 also had space for respondents to give any other reason they felt important that were not already listed. None used this opportunity to present any different views. Question 7 asked: W hat is the main reason for not preparing environmental data? There were four options, shown in table 4:2 with the mean average score and standard deviation of each statement and overall standard deviation of the question. . Table 4:2. Summary of question 7 results Std. Dev Std. of Dev. Of statement question 1.90 1.25 0.82 1.21

Question 7. Shareholders do not require this information Not company policy Economic considerations Lack of time

Mean 2.43 2.71 3.00 3.14

0.32

Shareholders not requiring this information was the most important factor and scored a mean average of 2.43 while time was the least important and scored an average of 3.14. However Shareholders not requiring the information also displayed the greatest standard deviation and in fact only one respondent did not answer either 1 or 5 for this statement. Question 8 asked: W hat would be the greatest incentive to commence environmental reporting? There were eight options, shown in table 4:3 with the mean average score and standard deviation of each statement and overall standard deviation of the question. Table 4:3. Summary of question 8 results Std. Dev of statement 0.38 0.84 0.79 1.27 Std. Dev. Of question 0.88

Question 8. Legislation Cost savings Access to capital/increased shareholder value Competetive pressure

Mean 1.14 1.50 1.57 2.43

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Risk management/reduction Improve other stakeholder relationships Ethical considerations Innovation and learning

2.57 2.71 3.86

1.51 0.95 0.76 1.07

Legislation received the lowest mean average score of 1.14 and was therefore the greatest incentive with 86% of respondents scoring this option as 1, and innovation and learning the least with 3.86. This question scored the widest spread of scores with a standard deviation of 0.88. Question 9 asked: W hat would be the greatest incentive to implementing an environmental management system? There were ten options, shown in table 4:4 with the mean average score and standard deviation of each statement and overall standard deviation of the question.

Table 4:4 Summary of question 9 results Std. Dev of statemen t 1.26 0.89 0.63 1.21 1.21 1.03 Std. Dev. Of questio n 0.41

Question 9. Economic considerations Cost savings Risk management/reduction Reputation or brand Strengthened supplier relationships Improved relations with

Mean 2.00 2.33 2.67

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governmental authorities Innovation and learning Ethical considerations Employee motivation Market position/share improvement

2.83 3.00

1.17 0.98 0.89 0.89

There were three statements tieing for most important with a mean average of 2, they were; economic considerations, risk management/reduction, and cost savings. The least important options were jointly employee motivation and market position/share improvement scoring 3 each. The standard deviation was 0.414. Both questions 8 and 9 had space for any other reasons but no respondent made any other comments here. Finally there was space for comments the respondent may feel relevant to the environmental reporting debate. There were few additional comments but of those that did comments made included that the company operate overseas and exceed local standards although see no need for preparation of an environmental report. Another respondent failed to observe any link between environmental reporting and cost savings, innovation and learning and risk management. It was observed that the difference between management and reporting should be distinguished and that the management was an important aspect but the reporting not so.

4:2 Anal ysis The number of responses was disappointing although to be expected from the number sent out and above the expected average which could indicate a general interest in the subject, or maybe just sympathy for the author and the task being undertaken. Generally low returns may be an indication of the apathy felt amongst many for the necessity to provide environmental information. However it may also be due to the questionnaires being sent out during peak holiday season and respondents being on leave! However all respondents were at board level so that signifies an awareness of the issues at that level

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4:2:1 Section 1 The responses to section one were as expected from the initial web site search. The questions had still been asked in order to discover whether there was internal reporting being undertaken as environmental reporting could be a contentious area if there are adverse situations to report which companies would prefer not to make public. The number of companies with an EMS in operation was also disappointing being just over half of respondents, with only some subsidiaries operating an EMS, all using ISO14001. No other environmental initiatives have taken place and environmental auditing does not appear to have been recognised as a useful management tool, other than in conjunction with the implementation of ISO14001. The chance to explore this issue further would give the opportunity to discover how long companies had been reporting for and to question those that did not report whether they had plans to implement an EMS. This would give information as to the rate of adoption on EMS which may be viewed as an important step in initiating environmental reporting. 4:2:2 Section 2 It is encouraging that the need for accountants to be involved in the preparation of environmental reports has been recognised by the majority of respondents. It also assists in validating the data as if 100% of respondents did acknowledge the need for accountants to be involved the overall responses would have been biased in that direction. The need arises not only because of the increasing need for triple bottom line or social and environmental reporting in the annual report, which will become inevitable for many AIM listed companies, but because financial reporting issues such as impairment of assets and environmental liabilities must be recognised. (Gray, 2003) The accountant also needs to have awareness of environmental legislation in that changes may impact on the business through the goods it can supply or suppliers or customers it can do business with. The business case for environmental reporting seems to be poorly understood among some respondents who perhaps have not recognised that linking environmental and financial performance can be beneficial not only for economic reasons but in shareholder/stakeholder relations and possibilities for innovation to acquire competitive advantage. The comments made after this section seem to indicate that there may be a misunderstanding of the true nature and

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discipline of environmental reporting. The financial impact/cost aspect is the most easily recognisable theme and this is confirmed in the later questions where financial aspects rate highest in question 9 and second highest, after legislation, in question 8. Of course the respondents are taken from the finance function so it would be nave at best to assume that other motivations may be paramount. In question 7 shareholders not requiring the information is perceived as the most important reason for not reporting may indicate information asymmetry and a lack of consultation with shareholders, this may be corroborated by the next more important reason being not company policy as a company which has extensive consultation with its shareholders should incorporate their wishes into its business strategy. That the standard deviation is also greatest for this question possibly indicates that shareholders are given the greatest consideration of all stakeholders (Although consideration need not necessarily lead to consultation). W ere there little consideration then the standard deviation may have had a far more mediocre score as did the importance of economic considerations. The constituency of shareholders may also be significant here; if shareholding is not diverse, of which there is a greater possibility in the AIM index than in the main index, then there may be little pressure to provide additional information. As shareholding has a minimum float of only 15% of available shares there will be little likelihood of shareholders using voice. The superior performance of the shares of many AIM index companies may also act as a disincentive to all but the most ecologically aware of shareholders to pursue greater consultation on this subject. Also in question 7 respondents rated a lack of time as the least important reason for not preparing environmental information; this may have been an incorrect interpretation on the respondents part. Robson, (2005) suggests the size of a company may affect the attitude to CSR (which includes environmental reporting) and that in smaller companies finance directors may have a plethora of other duties within the company and so view environmental reporting as either unnecessary or an opportunity to change, improve and integrate systems. If it is the former then it is possibly easier to say the information is not required than to state there is insufficient time. In question 8 the overwhelmingly most important reason for implementing environmental reporting was due to legislation with only one respondent choosing to score this as 2 rather

43

than 1. As imposing legislation levels the playing field for all companies this seems to indicate that in general companies have not recognised the potential competitive advantage benefits of voluntarily reporting. This theory is strengthened as the least important reason is innovation and learning suggesting that competitive advantage through innovation in areas other than the core business has not been considered. This response also contradicts the KPMG (2005) survey of drivers for corporate responsibility, which found that innovation and learning was regarded as being very important, and above items such as cost savings and risk management, to respondents from larger organisations. Not surprisingly economic considerations, cost savings and access to capital were the next more important factors. As many AIM companies have recently floated to raise external finance this will be a major consideration. That many make a trading loss could be a significant factor should this research have been carried out among a larger sample. Providing sufficient capital could be described as a basic need using Maslows hierarchy of needs which would explain the importance placed on the economic considerations. The necessity to comply with legislation also has a financial aspect as the costs of non-compliance can be excessive. Stakeholders appear to be given little consideration upholding the shareholder model implied by the importance of shareholders in question 7. This contradicts much contemporary research on larger organisations showing the strengthening of the stakeholder model but may be a symptom of the developmental stage of the company as using Maslows hierarchy of needs consideration of others would be at a higher need level as stakeholders are perceived as having less immediate importance to the survival of the company. That ethical considerations appeared so low a priority may indicate that for the AIM listed companies trying to grow then ethics may come low on their list of priorities. This would concur with the assessment of growing companies provided by their analysis using the lens of Maslows hierarchy of needs. Ethical considerations would fall into the highest category of ego needs and until the lower needs have been satisfied, such as the need to operate successfully in their industry, then the ego needs remain unsatisfied. As ethical considerations were the joint second (along with innovation and learning) reason in the KPMG (2005) survey, a clear division is beginning to emerge between the recognition and perception of

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environmental reporting between larger organisations and those growing and emerging. That this question scored the highest overall standard deviation may indicate the strength of feeling among respondents and that recognition of factors such as innovation and learning and ethics are a long way from becoming important strategic tools. In question 9 the most important reason for implementing an environmental management system was again economic reasons tying with cost savings and risk management/reduction thereby reinforcing the supremacy of the importance of the financial position to companies. Risk management/reduction has gained greater recognition than in question 8 so may have been recognised as relevant to the cost of capital. Curiously, reputation or brand is ranked in fourth place while market position/share is ranked in last place. Initial consideration might deem these to be similar but the importance of reputation as an intangible asset does appear to take greater precedence than market share, recognising long term advantage that can be obtained through reputation/brand management. This may contradict previous answers giving greater significance to financial considerations as a greater market share can equal higher turnover. That improved relations with governmental authorities is ranked sixth may suggest that companies do not see the implementation of EMSs as a legitimising tool for the purpose of impeding legislation, which is seen as the most important driver to implement environmental reporting. Other stakeholders, in the form of suppliers and employees again fail to rate highly with suppliers being perceived as of greater importance than employees. This corroborates the findings of question 8 in relation to stakeholders. That employee motivation should be ranked as joint least important and innovation and learning only scored slightly higher could indicate that managements strategic priorities in other areas may also need review. Examining the results using the theories discussed in the literature review there is little evidence to suggest external stakeholders to the company received consideration in the decision whether or not to provide this information. Even internal stakeholders such as employees receive little consideration: this is in agreement with ODwyer et al (2005) research findings showing a misconception of the importance

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stakeholders place on environmental matters. The wide group of stakeholders described in much of the literature does not seem to have any significant influence over management decisions in relation to environmental matters and so the business case for environmental reporting is rejected in the case of AIM listed companies. On these grounds stakeholder theory cannot be used to explain the motivations for environmental reporting among these companies. If companies see legislation as the greatest incentive to commence reporting legitimacy theory suggests that they will commence voluntary reporting in order to postpone government intervention and the issuance of additional legislation. 57% of respondent companies had implemented an environmental management system, at least in some parts of their organisations; this may suggest that this reporting is being carried out to legitimise their companies but when combined with the low score for improved government relations is inconclusive. Critical theory may go further in explaining the resistance to implement new systems suggesting that management may want to maintain the social order as it is so as to maintain their power, if new systems are brought in some of that power may be devolved to others, for example employees, diluting their power and hence resistance to change occurs. There is not direct evidence to verif y that this is the case but the rejection of stakeholder theory may suggest that management do wish to maintain the status quo by excluding others from discussion and the decision making process. The fact that 71% of respondents recognised the need for accountants to be involved in the preparation of environmental reports neither supports nor refutes the theory as there is not indication from the responses as to the motive for giving this answer. 4:3 Testing of the Validity of the Hypotheses and the Research Question answ ered. 4:3:1 Hypothesis testing H0 = That companies need to attain certain levels of development before implementing environmental policies and reporting. Maslows hierarchy of needs, taken in the context of companies, suggests that basic requirements such as capital and level of profitability must be met before higher needs such as ethical considerations will be considered. The results cannot be

46

conclusive on this as the research carried out is insufficient to prove or disprove this theory. To do this content analysis of annual reports would have had to have been carried out. However evidence obtained from the survey based on the importance placed on survival considerations may seem to indicate that the companies are at a low stage of development. That concepts such as employee motivation, ethics and innovation and learning, which are perhaps higher need ideas, are held in such little regard by these companies may indicate that thy have not yet attained this higher level of development. On this basis the hypothesis is tentatively upheld. H1 = That motivation for AIM listed companies w ill be the same as those identified w ithin the literature for larger organisations. The main motivation for AIM listed companies, from the responses received, appears to be legislation. Current research into larger organisations motives for environmental reporting identifies companies which report for legislative reasons and those that report for competitive advantage reasons. The AIM listed companies appear not to recognise the competitive advantage opportunities. Therefore the hypothesis is upheld in part H2 = A lack of understanding or implementation of the key concepts for the business case w ill lead to low rates of environmental disclosure. The financial considerations of the business case appear to be the best recognised of the three factors comprising the business case as outlined in the literature review. That risk management score more highly in question 9 than in question 8 may indicate that the environmental risk is identified more strongly than the reputational risk and that the full significance of this factor has therefore not been recognised. It appears that the components of competitive advantage have not been identified by the respondents with items such as innovation and learning and employee motivation regarded as so inconsequential. Overall there appears little understanding of the business case for environmental reporting therefore the hypothesis is upheld. 4:3:2 The Research Question Answ ered

47

W hat are the main motivations for AIM listed companies to adopt environmental reporting practices and do they differ from those adopted by larger companies? The overwhelming evidence from the information obtained was that legislation is the main motivation for companies in the AIM index to adopt environmental reporting. The secondary motivations were economic; either in the form of cost savings or access to capital and the creation of added value to shareholders. These findings concur in part with Khanna and Anton (2002) that the main reasons for reporting are either legislative or for competitive advantage reasons. That competitive advantage is a motivation is refuted on the evidence obtained from the research data. That a major motivation is for economic reasons agrees with the KPMG (2000) survey on corporate responsibility however their next most important reasons of ethical consideration and innovation and learning are far down on the list for AIM listed companies. Friedman and Staglianos (1992, in W ilmshurst and Frost, 2000) assertion that the motivation will only come from managerial attitudes seems the most appropriate, as while there is some convergence of motivations between the two groups of companies there does not appear to be a single motivator for either, although legislation could be said to be the strongest influence for the AIM companies. The most reasonable explanation for this appears to be when viewed through the lens of Maslows hierarchy of needs, in that the larger more successful companies have already achieved stability and growth and seek to capitalise on the benefits identified by authors such as Porter and Van der Linde (1995) and gain fresh competitive advantage as they exhaust other methods such as cost or labour advantages which might be preferable to companies in the growth stage. (Johnson and Scholes, 2002) To apply a needs hierarchy of an organisation to stakeholder theory it could be deemed that unless a company has satisfied its basic and security needs then it will pay little attention to the needs of stakeholders, if this is taken as a proxy for the need to have esteem of others. It may be that AIM companies have not reached this stage of development and therefore there may be little indication of a stakeholder approach in their strategy. To apply the stakeholder theory to environmental reporting it must be accepted that a wide range of stakeholders require

48

accountability from a company in varying forms of information to reject the theory is to reject the business case for environmental reporting. A company that does not embrace the stakeholder doctrine will be less able to take advantage of technological and legislative advances losing competitive advantage to competitors more accustomed to this environment. (Owen, 2003) Stakeholder theory must be dismissed as a motivator for environmental reporting as managers perceive stakeholders as not needing or expecting such information. This conclusion depends on the individual managers motivations however and as one person (the respondent to the questionnaire) within an organisation cannot be construed as representing the organisation as a whole assumptions have to be made to accept these conclusions.

Chapter 5 Conclusions The intention of the research was to investigate companies listed on the Alternative Investment Market (AIM) and find what will motivate them to produce environmental reports. The research identified the main drivers for environmental reporting in the AIM index to be legislation and economic considerations. The need for legislation has been well documented within the literature but there is insufficient evidence to prove conclusively that significant economic benefit can be obtained through environmental reporting. Currently there is very little environmental reporting but companies are beginning to implement environmental

49

management systems. That government ministers are promoting the use of such systems may seem to indicate that the government is happy to let companies provide environmental information on a voluntary basis or they may wish to encourage reporting so that when legislation is introduced there will be less of an outcry from companies complaining of the burden of red tape requirements; already large companies have the requirement to provide certain environmental information within the enhanced business review. The theoretical frameworks used to explain the necessity for environmental reporting are stakeholder and legitimacy theory. That the companies responding to the questionnaire placed little importance on the value of stakeholders, other than shareholders, seems to indicate that they have not identified the benefits associated with good stakeholder relations. This phenomenon is not solely the domain of smaller companies as research has shown there is a lack of dialogue or company focused reporting common among larger companies. That the companies may perceive they do not have powerful stakeholders who require environmental information may also be the case; this may be true or a lack of dialogue with stakeholders may lead to information asymmetry. Neither do companies appear to use environmental reporting as a legitimising tool even though their greatest concern is government intervention. They may perceive that the scale of their operations is below the level that would attract government attention or simply that through ignoring the subject it will go away. As there is no environmental reporting among the companies responding to the questionnaire it is impossible to assess whether they would use disclosure to legitimise their activities. Perhaps no adverse circumstances have yet arisen that they feel affects reputation sufficiently to warrant the use of these tactics. Looking at the results under the critical theory lens is does seem that there is a resistance to change but little to suggest that this is because companies wish to maintain the status quo but that other factors, such as economic and compliance issues, are of greater significance at the current time. That respondents generally feel the accountant has a role to play in environmental reporting suggests that change is not something to be avoided but perhaps other priorities take precedence. That Main Listed companies and those in the AIM Index differ appears to be due to the different evolutionary stages they are at.

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The responses to the questionnaire were interpreted using a means hierarchy framework to assess levels of motivation. As many AIM listed companies are in their early stages of growth their motivations will lie with achieving the profits and growth needed for survival and fitting the shareholder model more commonly linked with Friedman (1970) or Sternberg (2004); they are not concerned with higher needs such as the esteem of others which fits with the rejection of the stakeholder model. There is no motivation, other than that imposed by regulation that at the present time will encourage them to commence environmental reporting. The business case for AIM listed companies is not proven as used to explain the motivations of larger companies but does contain relevance for their actions. Grays (2003) definition will it make us or stop us losing money? (2) is the main preoccupation of these companies and the management approach is that of compliance. Financial and risk factors are the relevant indicators although risk management is not highly rated in comparison to the financial. Risk is perhaps connected to the cost of capital and its importance recognised in connection with direct financial activity rather than in relation to the environmental or reputational risk discussed in the literature review. Contrary to conclusions drawn from the literature review competitive advantage factors are low priority and are also inconsistent with finding of research on larger companies but could again be due to the evolutionary stage of the companies development. Environmental reporting appears to remain predominantly the domain of larger organisations but there is a growing awareness of the benefits of EMSs if not of environmental reporting. That all the companies responding to the survey who already used an EMS used ISO14001 raises the question as to why this is the most popular system for this particular group. Although the sample tested was statistically insignificant some tentative statements may be made from the results; The majority or respondents recognise the need for the accountant to be involved in the process of environmental reporting. Managerial perceptions may not always be correct in the shareholder/stakeholder context and may indicate a lack

51

of consultation or even a lack of desire to provide transparency and accountability. The companies responding to the survey may not have fully evaluated the business case for environmental reporting and only appear to have made weak links between risk, both environmental and reputational, and the potential financial benefits. The respondents do not appear to be fully aware of the competitive advantage benefits that may be obtained through innovation and only see the potential cost savings as relevant to this discussion. These savings however may not be considered sufficient to offset any set up costs.

Reasons cited by ISO (2006) including a lack of knowledge or understanding of systems or denial that they have any environmental impact, resource constraints or a lack of incentive to implement systems and ACCA citing cost as a major deterrent especially for smaller organisations both seem to encapsulate the prime reasons for not reporting.

5:1 Limitations of the Research and Suggestions for Future Research The main limitation is due to the small sample size used in the analysis, a larger survey providing statistically significant results would have provided much more robust information allowing greater insight into the subject. Interview with a cross section of finance directors would also have provided much richer information and could possibly have obtained fresh insight into the problem. That there is so little previously published research into smaller companies and environmental reporting practices was a concern resulting in the research being devised around what is already known mainly regarding larger organisations. This piece may lend a little more to that literature but the scale of the research detracts from its conclusions. Using a fixed needs hierarchy to analyse the results could be misleading if, as Maslow himself recognised, the order is not necessarily fixed. Therefore assumptions were made generalising the state of development of the companies responding to the survey. Further research could isolate

52

different factors, such as size, profit, turnover, or industry and length of time trading to provide a more in depth analysis for comparison against larger more established companies. As there is so little previous research into the motivation for smaller companies to provide environmental information this small survey could be a starting point for much more in depth research.

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Freidman, M. 1970. The Social Responsibility of Business is to increase its Profits. New York Times Magazine. Sept. 30 1970 reproduced in Donaldson, T. W erhane, P. H. Cording, M. 2002. Ethical Issues in Business: A Philosophical Approach. Pearson Education, New Jersey. Gray, R. 2003. Environmental Reporting and Accounting Draft 2d (8.08.03) at: http://standrews.ac.uk/~csearweb/research/resources/dps-socenvenrepacc.html GRI Guidelines at: http://www.globalreporting.org/guidelines/2002/gri_2002_guidel ines.pdf accessed 14/07/06

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Guthrie, J. Parker, L. D. 1989. Corporate Social Reporting; A Rebuttal of Legitimacy Theory. Accounting and Business Research. Vol. 19 No. 76 p 343-352 Henriques I. Sadorsky, P. 1999. The Relationship between Environmental Commitment and The Managerial Perceptions of Stakeholder Importance. Academy of Management Journal. Vol. 42 No. 1 p87-99 Hussey, J. Hussey, R. 1997. Business Research: A Practical Guide for Undergraduate and Postgraduate Students. Macmillan Press Ltd. ISOa 2006 at: http://www.iso.org/iso/en/iso900014000/pdf/IMS0404-environment.pdf accessed 14/07/06 ISOb. 2006 http://www.iso.org/iso/en/prodsservices/otherpubs/iso14000/businessbenefits.pdf accessed 14/07/06 Inman, P. 2004. W ork: Double Standards Cloud the Issue. The Guardian Jobs and Money July 17 2004 Pg 23 Jackson, R. Milne, M. Owen, D. 2000. Environmental Reporting and the Medium Sized Company. Social and Environmental Reporting. Vol. 20 No. 2. p1-5 Johnson, G. Scholes, K. 2002. Exploring Corporate Strategy. Pearson Education Ltd. Jones, K. 2000 Study on Environmental Reporting by Companies. European Commission Khanna, M. Anton, W . R. Q. 2002. W hat is Driving Corporate Environmentalism: Opportunity or Threat? Corporate Environmental Strategy. Vol. 9 No. 4 p409-417 KPMG, 2005. International Survey of Corporate Sustainability Reporting. June 2005 http://www.kpmg.com/NR/rdonlyres/66422F7F-35AD-42569BF8-F36FACCA9164/0/KPMGIntlCRSurvey2005.pdf Kreiger, I. 2006. United Kingdom Corporate Governance Update Part 1 of 3. Deloitte. Mondaq Business Briefing 17 t h March 2006. LSE 2006. http://investaquest.londonstockexchange.com/engb/pricesnews/prices/aimIndex.htm?bsg=true&in=AXX7500

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Medawar, C. 1976. The Social Audit: Apolitical View. Accounting, Organisations and Society. Vol. 1 No. 4 p389-394 Mullins, L. J. 2006. Essentials of Organisational Behaviour. Pearson Education Ltd. New Straits Times. 2003. Focus on Environmental Management and SMEs. New Straits Times Press (Malaysia) Berhad. November 16 2003. Norman, W . MacDonald, C. 2004. Getting to the Bottom of the Triple Bottom Line. Business Ethics Quarterly. Vol. 14. Iss. 2. p 243-262 ODwyer, B. 2000. Evidence and the Public Interest versus Expediency: Critical Commentary on Could Corporate Environmental Reporting Shadow Financial Reporting? Accounting Forum Vol. 24 No.2 June 2000 ODwyer, B. Unerman, J. Bradley, J. 2005 Perceptions on the Emergence and Future Development of Corporate Social disclosure in Ireland. Accounting, Auditing and Accountability Journal. 18, 1 Owen, D. 2003 Recent Developments in European Social and Environmental Reporting and Auditing Practice-A Critical evaluation and Tentative Prognosis. ICCSR Research Paper Series No. 03-2003 ISSN 1479-5124 Porter, M. Van der Linde, C. 1995 Green and Competitive Ending the Stalemate. Harvard Business Review. Sept-Oct 1995 Vol. 73 Iss. 5 p120 Robson, A. Pemberton, B. McGrane, A. 2005. Business Research Analysis. Pearson Custom Publishing. Essex. Robson, C. 2006. Corporate Citizens. ACCA Potential 11/08/06 at: http://potential.accaglobal.com/e_article000635045.cfm?x=b7S C4tl,b5vgBCbM Ryan, B. Scapens, R. Theobald, M. 2002. Research Methods and Methodology in Finance and Accounting. Thomson Schaltegger, S. Burritt, R. 2000. Contemporary Environmental Accounting: Issues, Concepts and Practice. Greenleaf Publishing Ltd.

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Sternberg. E. 2004. Corporate Governance: Accountability in the Marketplace. The Institute of Economic Affair, London Ticehurst, G. W . Veal, A. J. 1999. Business Research Methods: A Managerial Approach. Pearson Education Ltd Toms, J. S. 2000. Environmental Management, Environmental Accounting and Financial Performance. CIMA Publishing Toms, J. S. 2001. Eco-logical. Financial Management. January 2001 p14-16 Toms. J. S. 2002. Firm Resources, Quality Signals and the Determinants of Corporate Environmental Reputation: Some UK Evidence. British Accounting Review. Vol. 34 p 257-282. W agner, M. Schaltegger, S. 2003. How Does Sustainability Performance Relate to Business Competitiveness? Greener Management International. W inter 2003 W atson, D. Head A. 2004. Corporate Finance: Principles and Practice. Pearson Education Ltd. W ilmshurst, T. D. Frost, G. R. 2000 Corporate Environmental Reporting: A Test of Legitimacy Theory. Accounting, Auditing and Accountability Journal. Vol. 13 No. 1 p10-26. W oods, C. 2006. OFR is back on the Agenda for UK Government. The Accountant. Feb 24, 2006 i6027 p3(1)

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Belal, A. R. 2002. Stakeholder Accountability or Stakeholder Management: A Review of UK Firms Social and Ethical Accounting, Auditing and Reporting Practices. Corporate Social Responsibility and Environment Management 9, 8-25 Deegan, C. Rankin, M. 1997. The Materiality of Environmental Information to Users of Annual Reports. Accounting, Auditing and Accountability Journal, 10,4.

Everett, J. 2003. Exploring (False) Dualisms for Environmental Accounting Praxis. Critical Perspectives on Accounting. Vol. 15 Iss. 8. p1061-1084 Fayers, C. Cocklin, C. Holmes, D. 2000. Environmental considerations in the Decision of Australian Investment Professionals. Journal of Environmental Assessment Policy and Management. Vol. 2 No. 2 p173-201. Friedman, M. 1970. The Social Responsibility of Business is to Increase Its Profits. New York Times Magazine. 13 t h September 1970 Haddock, J. 2005. Consumer Influence on Internet based Corporate Communication of Environmental Activities: The UK Food Sector. British Food Journal. Vol. 107 No. 10 p 792-806 Konrad, A. Steurer, R. Langer, M. E. Martinuzzi, A. 2006. Empirical Findings on Business-Society Relations in Europe. Journal of Business Ethics. (2006) 63: 89-105 Lydenberg, S. 2005. Social and Environmental Data as New Tools. The Journal of Investing. Fall 2005 Solomon, A. 2000. Could Corporate Environmental Reporting Shadow Financial Reporting? Accounting Forum. Vol. 24. No. 1. March 2000 Solomon, J. Solomon, A. 2004. Corporate Governance and Accountability. John W iley & Sons Ltd. Thorpe, J. Prakash-Mani, K. 2003. Developing Value: The Business Case for Sustainability in Developing Markets. Greener Management International.Vol.44 W inter 2003 W eb sites:

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http://www.bitc.org.uk/ Business in the Community http://www.st-andrews.ac.uk/~csearweb/index.html Centre for Social and Accounting Research http://www.sustainability.com/ Sustainability

Appendix A An overview of environmental reporting systems frameworks and awards.

i) DEFRA: The governments Department of Environment Food and Rural Affairs (DEFRA) have produced their Environmental Key performance Indicators: Reporting Guidelines for UK Business in January 2006. This list of 22 KPIs is aimed at increasing quantified environmental information, giving consideration to how supply chain members affect the environment and defining sector relevancy of the KPIs. (Deloitte, 2006) The guidelines have been designed to provide relevant indicators to all sizes of company in order to encourage those outside the FTSE250 to report. (DEFRA,

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2006) DEFRA claim that following these guidelines will assist companies in complying with the EU Accounts Modernisation Directive. ii) Eco-Management and Audit Scheme (EMAS): aims to recognise and reward those organisations that go beyond minimum legal compliance and continuously improve their environmental performance. (EMAS, 2003) This is not an EMS in its own right but incorporates ISO 14001 with greater requirements for environmental reporting and performance. It is administered by the European Union, it is voluntary but implementation can show immediate cost savings through reduced environmental taxes such as those levied by the Environment Agency for pollution prevention. (EMAS, 2003) It goes further than ISO14001 and therefore is preferred by government and is promoted by DEFRA and in conjunction with the DEFRA KPIs could be seen as the governments attempt to persuade companies that voluntary disclosure would be preferable to legislation. iii) ISO14001: was developed by the International Organisation for Standardisation as a voluntary standard, recognised and accepted worldwide, to promote environmental management systems and companies undertaking the standard are required to constantly improve their performance. In 2001 nearly 37,000 organisations in 112 countries had certified EMSs and the standard is suitable for organisations of all sizes and descriptions. Organisations wishing to further develop evaluation and reporting procedures can progress to other standards in the ISO family. The organisation provides much useful information for the SME in devising and implementing an EMS, from initial evaluation of environmental impacts through to devising an environmental policy and developing environmental indicators. (ISOa, 2006) As this is a voluntary initiative certification is not a requirement so initial assessment need not be an expensive process and the measurement of key indicators will assist in management of the system. iv) GRI: The Global Reporting Initiative (GRI) has similar aims to the ISO 14001 and promotes these aims through its sustainability reporting framework which was first issued in 1999 and updated in 2002; a revised framework is to be issued in October 2006, showing that this type of reporting is evolving just as that of financial reporting is also doing. They believe that sustainability reporting should have the same comparability as financial reporting with around one thousand

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organisations worldwide using the framework. The GRI is a not for profit organisation comprising experts from around the world who assist in the development of the framework. (www.globalreporting.org 2006) Unlike ISO14001 which is a generic standard the GRI has sector supplements to tailor reporting to particular sectors needs neither is the GRI a set of standards or a management system, but a framework, in much the same way as the ASB has issued to accounting standards framework, it is intended to provide principles to be applied thereby resulting in consistency across organisations reporting practices. v) ACCA Awards: To promote greater transparency ACCA has developed annual awards systems throughout the world the aim of which is: To give recognition to those organisations which report and disclose environmental, social or full sustainability information To encourage the uptake of environmental, social and sustainability reporting, and To raise awareness of corporate transparency issues. (ACCA, 2006) W hile this is good in principle it does little to encourage SMEs to commence environmental reporting and the winners in 2005, with the exception of Traidcraft (Best Social Account) were all massive multinational organisations. Although these organisations have huge public visibility they only make up a small percentage of the economy demonstrating a lack of incentive for smaller organisations to report. Appendix B

Practice and Motivation in Environmental Reporting

I would be very grateful if you could spare about fifteen minutes to complete and return the attached questionnaire. This research forms part of my dissertation project for completion of an MA International Accounting at Newcastle Business School, Northumbria University. The project is to investigate the drivers for environmental accounting and reporting among AIM listed companies. The majority of major companies listed on the London Stock Exchange now produce some type of stand alone report, be it environmental, sustainability or social in nature. In contrast, newer and often

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rapidly expanding companies listed on the AIM index, appear to report little of this type of information. A recent survey by KPMG showed that the main drivers for these companies were economical and ethical considerations and innovation and learning. Therefore this questionnaire is targeted at Finance Director level in order to investigate whether company boards take these considerations into account when devising their business strategy. AIM listed companies have been targeted as they often move into the official list as they grow but little research has been previously carried out to investigate at what point environmental considerations become part of overall strategy. Furthermore many AIM listed companies abide by the Combined Code on Corporate Governance, although this is not a requirement of the listing, which requires disclosure of material non-financial matters but an initial search of company web sites has revealed little significant disclosure even in industries perceived to have a high environmental impact. Confidentiality is assured in the final report and no personal or identifying details will be used. All questionnaires will be destroyed once the project is complete. By completing and returning the questionnaire it is assumed that respondents are satisfied that they have no ethical concerns. Thank you for you assistance and input into this project. Please return by 5th August 2006 Name:. Company: Position:.. Would you like to receive a copy of the completed report? Y N

SECTION 1 This section is to discover the current level of environmental reporting and activity within companies. Please circle one option. 1. Do you currently provide any form of financial reporting on the economic impact of environmental matters? Y N If No please go to question 3 2. Is this information publicly available? Y N

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3. Does your company operate an environmental management system?Y N If so, which one? EMAS ISO14001 GRI Other

4. Do you provide any other forms of non-financial reporting, e.g. social responsibility? Y If yes, what type? 5. Has your company ever undergone an environmental audit? Y

If yes how frequently has this taken place? Annually 2 Yearly 3 Yearly Other.

SECTION 2 This section attempts to understand what the drivers are for environmental reporting 6. Do you believe that the accountant has a role in the preparation of environmental reports? Y N Please use this space to provide comment .. Please rate each statement from 1-5 with 1 being the most important and 5 the least important. 7. What is the main reason for not preparing environmental data? 1 2 3 4 5 Lack of time Not company policy Shareholders do not require this Information

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Economic considerations

8. What would be the greatest incentive to commence environmental reporting? 1 2 3 4 5 Legislation Competitive pressure Cost savings Access to capital/increased shareholder value Improve other stakeholder relationships Ethical considerations Innovation and learning Risk management/reduction Other .

9. What would be the greatest incentive to implementing an environmental management system? 1 2 3 4 5 Economic considerations Ethical considerations Innovation and learning Employee motivation Risk management/risk reduction Reputation or brand Market position/share improvement Strengthened supplier relationships Cost savings Improved relationships with governmental authorities Other . Please use this space to make any comments you feel are relevant to the environmental reporting debate ..

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Appendix C Company Business Sector FD Contact details Comments Finished products offer cost and environmetal savings but no mention of company policy etc. mention of environmental impact studies in 2005 a/c's but this is for granting of mining licence Complia nce with CC Web site address

Accsys Tecnologies plc

environmental science and technology Glyn Thomas

46 Berkeley Square, London W1J 5AT

n/k

www.accsysplc.com

African Copper plc

Copper mining Bradley Robert Kipp CFO info@africancop per.com Joseph Hamilton, 100 Pall Mall, St James's, London, SW1Y 5HP

iaw AIM guideline s

www.africancopper.com

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Angel Biotechnology plc

Pharmaceutic als

Gordon Sherriff (Business Develpoment Director)

gordon.sherriff @angel.bio.com 44 Colbourne Crescent,Nelso n Park Ind Est, Cramlington, NE23 1WB 01670 591920

Floated Nov 05, 1st year losses, no mention of environmental policy on web site

No reports therefore no mention of corp gov

www.angelbio.com

Applied Optical Technologies plc

Lens tecnology

Mike Angus

Belgravium Technologies plc

Manufacture computers and data capture systems

Mike Unwin Group Fin Controller/ Co Sec

40 Phoenix Rd. Crowther Disctrict 3, Washington, Tyne & Wear, NE38 OAD Campus Road, Listerhills Science Park, Bradford, BD7 1HR Co Sec Add 151 Vincent St, Glasgow, G2 5NJ

No environmental policy or discussion

Annual report summary is pr exerciseno financials or cg

www.aotgroup.com

Biofuels Corporation plc

Alternative fuel production Bob (R D) Green (Financial Controller Stephen Harrison)

mail@biofuels.c om 16 Earls Nook, Belasis Hall Technology Park, Billingham, Teeside, TS23 4EF Wharton Court, Leominster, Herefordshire, HR6 0NX

no environmental policy or discussion production of environmentall y friendy biodiesel - 95 accounts state environmental matters discussed at board level but no enviro datamember of Industry Nature Conservation Association (INCA)

no

www.belgravium.com

iaw CC where appropria te also provide a CSR report incl brief outline of enviro policy

www.biofuelscorp.com

Bioganix plc

processing organic waste Julian Morgan

co. can make a "significant contribution for food companies

no- no publishe d a/c's on web site AIM

www.bioganix.co.uk

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working to ISO14001"

04/06

Booth Industries Group plc

Engineering

BNS Telecommunicati ons plc

Telecoms David Horrocks

PO Box 50, Nelson St, Bolton, BL3 2AP Telcom House, Princess Way, Low Prudhoe, Northumberland , NE42 6NJ

product web siteno company info no environmental policy or discussion, no financials at all! iaw legislation and no adverse report during 2005 reporting period iaw CC where appropria te audit and remun committe e but no ref to CC

www.boothindustries.co.uk

www.bnstelecomplc.com

Borders and Southern Petroleum plc

oil exploration Peter Fleming

fleming@border sandsouthern.c om 33 St James Square, London, SW1Y 4JS

www.bordersandsouther n.com

Cambridge Mineral Resources plc

Exploration and mining Michael Burton

10 Fenchurch Av, London, EC3M 5BN office@cambmi n.co.uk

Cardinal Resources plc

Oil & gas production

Graeme W Moore Group Fin Cont Charles C Green CFO

Whitefriars House, 6 Carmelite St, London, EC4Y 0BS

Cassidy Brothers plc

Toy manufacture H Bradley Accountant Mitcham Road, Blackpool, FY4 4QW Portland House, 4 Great portland St, London, W1W 8QJ Number 1, Netherhampton Business Centre, Netherhampton, Salisbury, Wilts. SP2 8PU

no environmental policy or mention of anvironmental matters Contingent liabilities for environmental cleanups. CSR contribution for local communities. meet International Council of Toy Industries code of conduct on ethical and environmental matters

Quoted compani es alliance (QCA) for AIM listed co's

www.cambmim.co.uk

yes

www.cardinal-uk.com

no

www.casdon.co.uk

Catalyst Media Group plc

Media company

Stephen Smith CFO

nothing

no

www.cmg-plc.com

Clarity Commerce Solutions plc

Software solutions Richard Arnold CS

nothing

yes

www.claritycommerce.c om

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Coffee Republic plc

Caf's

Simon Drysdale

Ground Floor, 109-123 Clifton Street, London, EC2A 4LD reg off: 50 Lothian Road, Festival Square, EH3 9WJEdinburgh

D1 Oils plc

Alternative fuel production Richard Gudgeon webenquiries@ d1oilsplc.com Forty Foot Road, Middlesbrough, TS2 1HG

nothing "sustainable" 2005 report states it will improve local environment in which it operates but no quantitive data

yes

yes

www.d1plc.com

Desire Petroleum plc

oil exploration Co sec Mrs Anna Ruth Neve

Mathon Court, Mathon, Malvern, Worcs. WR13 5NZ Melville Nursery, Lasswade, Midlothian, EH18 1AZ Domino's House, Lasborough Road, Kingston, Milton Keynes, MK10 0AB

Dobbies Garden Centres plc

garden centres Sharon Brown

environmental impact assessment (EIA) prepared & on web site. This is required by Falklands Island law Chairman "environmentall y responsible" Environmental policy in annual report 2005 AR "responsible attitude towards environment" BSEN ISO14001 Accredited. Environmental policy produced 2001. Environmental budget for staff training at Monckton Coke Works but no quantitive data

yes

www.desireplc.co.uk

yes

www.dobbies.com

Dominos Pizza UK & Irl plc

pizzas Lee Ginsberg

yes

www.dominos.co.uk

Hargreaves Services plc

Waste Services

Esh Winning Industrial Estate, Durham, DH7 9PT

interim results only contain no cg ref

www.hargreavesservice s.co.uk

69

Immunodiagnosti c Systems Holdings plc

Pharmaceutic als

Paul Hails

cc@idsltd.com Boldon Business Park, Boldon, Tyne & Wear, NE35 9PD

CSR report but little environmental info in 2005 report "meets statutory requirements" re haz waste

adopted to AIM model code (cc where applicabl e)

www.idsltd.com

Metnor plc

Property Development

Mr K A Atkinson

Monsoon plc

Retailing Mark McMenemy

Monstermob plc

Mobile telecoms

David Marks

Mulberry Group plc

Retailing

Norman Hay plc

Coatings

Guy Rutherford Brigid M Cattle CS Victor P Bellanti CEO

Metnor House, Mylord Crescent, Killingworth, Tyne & Wear NE12 5YD Monsoon Building, 179 Harrow Road, London, W2 6NB 76 Chruch St. Lancaster, LA1 1ET The Rookery, Chilcompton, Somerset, BA3 4EH Godiva Place, Coventry, CV1 5PN

Metnor Construction "seek out environmentall y friendly building methodology" 2005 annual report. No other enviro info.

environmental policy in AR

yes "directors have a system of control"

www.metnor.co.uk

www2.monsoon.co.uk www.monstermobgroup. plc.uk

nothing no AR's online, no policy statements of any type

yes

no

www.mulberry.com

Parkdean plc

Holiday Parks

Michael Norden

Second Floor, One Gosforth Park Way, Gosforth Business Park, Newcastle upon Tyne, NE12 8ET

Portmerion Group plc

marketing chianware Brett W. J. Phillips

London Road, Stoke on Trent, Staffordshire, ST4 7QQ

nothing Sites with Blue Flag or David Bellamy conservation award listed on holiday web site but no info on business site, no financials etc. suppliers required to meet environmental standards but no discussion of environmental

no

www.normanhay.com

no

www.parkdeanholidaysp lc.com

yes

www.portmerion.co.uk

70

policy in AR

Premier Direct plc

Direct Selling novelty goods Andrew D Dean

Romag Holdings plc

Manufacture of photovoltaic panels David E Banks

Simonside East Industrial Park, Newcastle Road, South Shields, NE34 9AA Lope Hill Road, Leadgate Industrial Estate, Lope Hill, Consett, Co. Durham, DH8 7RS

no mention of any environmental concerns at all

no

www.premierdirectgroup .co.uk

Stadium Group plc

Manufacturing - electronics

David Collins Company Secretary

Tanfield Group plc

Engineering and electric vehicles T P Robinson

Tolent plc

Construction

I Swire (Trevor Phillipson, Director at Team Valley)

Torday and Carlisle plc

NO WEB SITE FOUND

Ultimate Leisure plc

Pubs & Clubs C A Bell

david.collins@st adium.co.uk Stephen House, Brenda Road, Hartlepool, TS 25 2BQ Unit 95/2, Tanfield Lea Industrial Estate North, Tanfield Lea, Co. Durham, DH9 9NX Ravensworth House, 5th Avenue Business Park, Team Valley, Gateshead, NE11 0HF Unit 1, Mill House Business Park, Darlington Road, Northallerton, N. Yorks. DL6 2NW 26 Mosley Street, Newcastle upon Tyne, NE1 1DF

no mention of any environmental concerns at all no mention of any environmental concerns at all

yes

www.romag.co.uk

yes

www.stadium.co.uk

zero emission vehicles Have environmental policy but not accessible through web site

yes

www.tanfieldgroup.co.uk

not mentione d

www.tolent.co.uk

Zytronic plc

Manufacturing -optical filters

Denis G W Mullan

denis.mullan@z ytronic.co.uk Paterson St, Blaydon, Tyne & D10Wear, NE21

no mention of any environmental concerns at all no mention of any environmental concerns at all

yes

www.ultimateleisure.co m

yes

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