CORPORATE SUSTAINABILITY IN AUSTRALIA ...Corporate Sustainability in Australia: Performance,...
Transcript of CORPORATE SUSTAINABILITY IN AUSTRALIA ...Corporate Sustainability in Australia: Performance,...
CORPORATE SUSTAINABILITY IN
AUSTRALIA: PERFORMANCE,
DISCLOSURE AND GOVERNANCE
Zhongtian Li
Master of Business (Research)
Submitted in fulfilment of the requirements for the degree of
Doctor of Philosophy
School of Accountancy
QUT Business School
Queensland University of Technology
2020
Corporate Sustainability in Australia: Performance, Disclosure and Governance i
Keywords
Australia, Corporate Sustainability, Corporate Social Responsibility, Diction 7,
Readability, Sustainability Committee, Sustainability Disclosure, Sustainability
Reporting, Sustainability Performance, Thomson Reuters ASSET4, Tone of
Language
ii Corporate Sustainability in Australia: Performance, Disclosure and Governance
Abstract
This PhD thesis has three motivations. First, the current regulatory environment
for voluntary corporate sustainability in Australia is under pressure to become a more
structured framework. It is expected that more understanding about current corporate
sustainability practices actively contribute to relevant policy discussion. Secondly,
richer knowledge of corporate sustainability is beneficial to stakeholders, as corporate
sustainability continues to grow in importance. Thirdly, prior literature identifies fresh
research opportunities awaiting exploration.
Accordingly, I investigate the three themes in this thesis, namely sustainability
performance, sustainability disclosure and sustainability governance in the form of the
sustainability committee. Collectively, these themes emphasize listed firms’ practices
in Australia and form part of a larger research agenda of sustainability. Corresponding
research questions are proposed:
1) Whether and how is an Australian firm’s sustainability performance
associated with its sustainability disclosure?
2) How is experience of disclosure (i.e. number of years as to sustainability
disclosure) related to sustainability performance?
3) How is the sustainability committee related to sustainability performance?
This is operationalized as:
a. How is the presence of a sustainability committee related to
sustainability performance?
b. How is the effectiveness of the sustainability committee related to
sustainability performance?
Chapter 3 answers the first research question, and Chapter 4 addresses the second
and third research questions. Seven textual characteristics of disclosure are examined
in Chapter 3: how much sustainability information, quantitative information and
information about environmental impact is disclosed, to what extent disclosure is
readable, and to what extent disclosure is communicated in optimistic, certain and clear
terms. Chapter 4 operationalizes experience of disclosure as the number of years that
Corporate Sustainability in Australia: Performance, Disclosure and Governance iii
a firm has disclosed sustainability information, and it investigates the sustainability
committee from two aspects, namely presence and committee effectiveness.
Chapter 3 and 4 embrace different theories and develop hypotheses to explore
research questions. In Chapter 3, institutional theory and signalling theory are used to
develop hypotheses as to relationships between textual characteristics of sustainability
disclosure and sustainability performance. Chapter 4 considers prior literature about
(audit) committee effectiveness, resource dependency theory and stewardship theory
to develop hypotheses about experience of disclosure, the sustainability committee and
sustainability performance. As two chapters use different sets of control variables, the
sample sizes in them are slightly different.
By analysing 2,076 firm-year observations from 2002 to 2016, this thesis finds
good performers disclose more information, more quantitative data, more evidence
about environmental impact and present the information in optimistic, certain and clear
terms; good performers communicate in a more readable way. Whether sustainability
information is disclosed in an annual report or a standalone report affects relationships
between textual characteristics and sustainability performance. Varied sample periods
are found to affect the relationships. Different sectoral environments also affect how
sample firms prepare the information included in their sustainability disclosure. The
findings are robust to alternative measurement on performance and alternative model
specification. Lastly, textual characteristics in one period do not necessarily associate
with the sustainability performance occurring in a following period, and vice versa.
By examining 2,166 firm-year observations (2002 – 2016), this thesis reveals a
positive relationship between presence of a sustainability committee and sustainability
performance, and a positive relationship between the experience of disclosure and
sustainability performance. Through examining 430 firm-year observations in relation
to sustainability committees (2002 – 2016), I identify a positive relationship between
sustainability committee effectiveness and environmental performance. Moreover, I
find that increased resources and greater authority granted to sustainability committees
improves sustainability performance.
In modelling the relation between sustainability governance and performance, I
build into the research design endogeneity concerns due to several possible reasons,
including omitted variables, omitted selection and simultaneity. Thus, the propensity
score matching and dynamic generalized method-of-moments are adopted, and my
iv Corporate Sustainability in Australia: Performance, Disclosure and Governance
findings are not distorted by this endogeneity concern. Different sectoral environments
are found to affect the relation between the sustainability committee and sustainability
performance, yet varied sample periods do not have that same influence. Findings in
this chapter also are robust to alternative measurement of sustainability performance.
This thesis contributes to prior literature in at least two ways. First, it enriches
the knowledge about sustainability disclosure from linguistic perspectives. Secondly,
it contributes to the growing field, namely sustainability committee that is expected to
be an opportunity to better integrate sustainability into corporate governance.
From the view of theoretical contributions, this thesis uses different theories to
develop several hypotheses. First, as suggested by prior studies, Chapter 3 investigates
the explanatory power of both signalling theory and institutional theory. Differing
from the literature, this chapter explores an alternative context, namely various textual
characteristics of disclosure. Extending incomplete revelation hypothesis, Chapter 3
introduces this hypothesis to the corporate sustainability literature. Secondly, Chapter
4 explores stewardship theory and resource dependency theory within the context of a
sustainability committee.
Regarding practical implications, these findings do not support the existence of
greenwashing in sustainability disclosure. As a sustainability committee contributes to
environmental performance, regulators and market operators can encourage directors
in Australia to form such committees and ensure their efficacy to better integrate
sustainability with corporate governance. Readability of sustainability disclosure
information should be further considered by regulators in future regulatory framework,
as this thesis reveals that those who read sustainability disclosures can be misled by
how poor performers communicate their performance.
Corporate Sustainability in Australia: Performance, Disclosure and Governance v
Table of Contents
Keywords..............................................................................................................................i
Abstract ...............................................................................................................................ii
Table of Contents ................................................................................................................. v
List of Figures .................................................................................................................... vii
List of Tables ....................................................................................................................viii
List of Abbreviations............................................................................................................ x
Statement of Original Authorship ........................................................................................ xi
Acknowledgements ............................................................................................................ xii
Chapter 1: Introduction .................................................................................... 1
1.1 Regulatory Framework ............................................................................................... 2
1.2 Research Motivations ................................................................................................. 5
1.3 Research Purpose and Questions ................................................................................ 9
1.4 Contributions ........................................................................................................... 14
1.5 Summary of the Findings ......................................................................................... 17
1.6 Thesis Outline .......................................................................................................... 18
Chapter 2: Literature Review......................................................................... 27
2.1 Sustainability Disclosure and Sustainability Performance ......................................... 27
2.2 Linguistic Studies about Financial Information ......................................................... 33
2.3 Corporate Governance and Sustainability Performance ............................................. 36
2.4 Corporate Governance and Sustainability Disclosure ................................................ 38
2.5 Corporate Sustainability: Australian Evidence Since 2014 ........................................ 41
Chapter 3: Textual Characteristics of Sustainability Disclosure and their
Relationship to Sustainability Performance ........................................................ 61
3.1 Introduction ............................................................................................................. 61
3.2 Relevant Key Literature ........................................................................................... 65
3.3 Theoretical Framework and Hypothesis Development .............................................. 67
3.4 Research Design ....................................................................................................... 71
3.5 Results ..................................................................................................................... 86
3.6 Discussion and Conclusion ..................................................................................... 111
Chapter 4: The Sustainability Committee, Experience of Sustainability
Disclosure and Sustainability Performance ....................................................... 115
4.1 Introduction ........................................................................................................... 115
4.2 Literature Review ................................................................................................... 119
4.3 Theoretical Framework and Hypothesis .................................................................. 121
vi Corporate Sustainability in Australia: Performance, Disclosure and Governance
4.4 Research Design .................................................................................................... 125
4.5 Results ................................................................................................................... 137
4.6 Discussion and Conclusion..................................................................................... 160
Chapter 5: Conclusions ................................................................................ 163
5.1 Summary of this Thesis .......................................................................................... 163
5.2 Summary of the Findings ....................................................................................... 166
5.3 Contributions and Practical Implications ................................................................ 168
5.4 Limitations and Opportunities for Future Research ................................................. 173
Appendices .......................................................................................................... 175
Appendix A Details about Asset4’s Scores ....................................................................... 175
Appendix B Example of Sustainability Disclosure – Input to Diction 7 ............................ 179
Appendix C Outputs from Diction 7 ................................................................................. 181
Appendix D Principal Component Analysis of Four Readability Indices........................... 188
Appendix E Example of a Sustainability Committee ........................................................ 189
Appendix F Example of How Information about Committee Members is Collected .......... 190
Bibliography ....................................................................................................... 199
Corporate Sustainability in Australia: Performance, Disclosure and Governance vii
List of Figures
Figure 1-1 Libby Boxes for Research Questions...................................................... 19
Figure 1-2 Thesis Roadmap .................................................................................... 25
Figure 3-1 Asset4’s Scores Structure: Environmental Performance/Score and
Social Performance/Score.......................................................................... 76
Figure 3-2 Asset4’s Scores Structure: Corporate Governance
Performance/Score and Economic Performance/Score ............................... 77
Figure 5-1 Connections between Chapter 3 and 4 .................................................. 165
viii Corporate Sustainability in Australia: Performance, Disclosure and Governance
List of Tables
Table 1-1 Summary of Key Components in this Thesis ........................................... 12
Table 2-1 Overview of Seminal Studies about the Relationship between
Sustainability Disclosure and Sustainability Performance ......................... 28
Table 2-2 Overview of Seminal Studies about Relationship between
Sustainability Disclosure and Corporate Governance ................................ 39
Table 2-3 Basic Information about 54 Studies from 2014 to 2018 in Nine
Designated Accounting Journals ............................................................... 43
Table 2-4 Summary of 54 Studies from 2014 to 2018 on Nine Designated
Accounting Journals.................................................................................. 44
Table 2-5 Research Themes and Methods of 54 Studies from 2014 to 2018 in
Nine Designated Accounting Journals ....................................................... 54
Table 3-1 Sample Selection .................................................................................... 73
Table 3-2 Variables and Their Measurements ......................................................... 81
Table 3-3 Descriptive Statistics .............................................................................. 87
Table 3-4 Correlation Matrix of Variables .............................................................. 88
Table 3-5 Equation (1) – Unexpected Part of Sustainability Performance
(DA_CSP) ................................................................................................ 90
Table 3-6 H1 and H2 .............................................................................................. 92
Table 3-7 Signalling Effects of Textual Characteristics in Sustainability
Disclosure ................................................................................................. 96
Table 3-8 Alternative Measurement on Sustainability Performance ........................ 98
Table 3-9 Sectoral Analysis .................................................................................. 101
Table 3-10 Disclosure Channels: Standalone Report versus Annual Report .......... 104
Table 3-11 Time Stability ..................................................................................... 106
Table 3-12 Alternative Model Specification.......................................................... 108
Table 3-13 Inclusion of Firms’ Experience of Sustainability Disclosure as a
Control ................................................................................................... 110
Table 4-1 Sample Selection .................................................................................. 126
Table 4-2 Variables and Their Measurements ....................................................... 133
Table 4-3 Descriptive Statistics ............................................................................ 138
Table 4-4 Correlation Matrix of Variables ............................................................ 139
Table 4-5 Experience of Sustainability Disclosure, the Presence of a
Sustainability Committee and Sustainability Performance – H3 and
H4a ......................................................................................................... 141
Corporate Sustainability in Australia: Performance, Disclosure and Governance ix
Table 4-6 Sustainability Committee Effectiveness and Sustainability
Performance – H4b.................................................................................. 143
Table 4-7 PSM – H3 ............................................................................................. 147
Table 4-8 PSM – H4a ........................................................................................... 148
Table 4-9 Dynamic GMM – H3 and H4a .............................................................. 149
Table 4-10 Dynamic GMM – H4b ........................................................................ 150
Table 4-11 2SLS – H4b ........................................................................................ 151
Table 4-12 Alternative Measurement on Sustainability Performance ..................... 153
Table 4-13 Sectoral Analysis................................................................................ 155
Table 4-14 Time Stability .................................................................................... 158
Table 4-15 Inclusion of Firm Age as a Control for H3 and H4a ............................. 159
Table 5-1 Summary of Research Questions, Hypotheses and Findings .................. 170
Table 5-2 Summary of Research Conclusions and Implications ............................. 171
x Corporate Sustainability in Australia: Performance, Disclosure and Governance
List of Abbreviations
ASX Australian Securities Exchange
ESG Environmental, Social and Governance
GMM Generalized method-of-moments
PSM Propensity Score Matching
Corporate Sustainability in Australia: Performance, Disclosure and Governance xi
Statement of Original Authorship
The work contained in this thesis has not been previously submitted to meet
requirements for an award at this or any other higher education institution. To the best
of my knowledge and belief, the thesis contains no material previously published or
written by another person except where due reference is made.
Signature:
Date: 13 July 2020
QUT Verified Signature
xii Corporate Sustainability in Australia: Performance, Disclosure and Governance
Acknowledgements
First, I thank my parents and grandparents for their support and love. Since 2009,
it has been a long haul for me to complete my Bachelor, Master and Doctor programs
in Australia. Without their encouragement and support, completion of such a long
journey would have been an impossible mission. I am proud to be the second doctor
in my family, and my mother is the first doctor.
Secondly, I appreciate my principal supervisor, Professor Ellie Chapple, for her
guidance, encouragement and support throughout the entire research journey. I met
Professor Chapple in 2015 when I enrolled in the Master of Business (Research)
program. I am lucky to have Professor Chapple as my supervisor. Her encouragement,
wisdom and advice greatly help me to surmount expected and unexpected challenges
in my research journey. Professor Chapple has also been a role model for me in relation
to how to research, how to write up a paper, and how to communicate with others. In
here, I would like to express my deepest gratitude to Professor Chapple.
Thirdly, I thank my associate supervisor, Dr. Elisabeth Sinnewe, and my external
supervisor, Dr. Shamima Haque. The time and effort which Dr. Elisabeth Sinnewe
devoted to my thesis is unquantifiable. Comments made by Dr. Elisabeth Sinnewe
helped me greatly to improve this thesis. I met Dr. Shamima Haque in 2015 when I
enrolled in the Master of Business (Research) program. Although Dr. Shamima Haque
moved to the United Kingdom in 2017, we still make a great team researching topics
within corporate social responsibility, and I received many comments and help from
her.
Fourthly, I thank my co-researcher and wife, Dr. Jing Jia, for so many things.
My life dramatically changed (in good ways) because of her. I never thought my
Doctor program could grant a degree as well as make me meet my wife. Without her
love and support, my research journey would have been much bumpier and more
challenging.
Fifthly, I thank A/Professor John Nowland and Dr. Ammad Ahmed for their help
and advice in my research journey. It is noteworthy that part of this thesis has been
presented in the 2017 A-CSEAR conference, the 2018 FIRN PhD symposium and the
Corporate Sustainability in Australia: Performance, Disclosure and Governance xiii
2019 APIRA conference. Professor Jacquelyn Humphrey, Professor Charl de Villiers
and other participants also give valuable comments about this thesis.
Sixthly, I also thank my friends at the Queensland University of Technology who
were always there with me sharing support, friendship, knowledge, and locations of
nice restaurants in Brisbane.
Seventhly, I acknowledge the financial support from Australian Government
Research Training Program Scholarship and QUT Excellence Top-up Scholarship.
Last but not least, I thank Clare Moore and Marita Smith for their professional
copy editing and proofreading advice in relation to this thesis.
Chapter 1: Introduction 1
Chapter 1: Introduction
Corporate sustainability has been endorsed by some international organizations,
including the United Nations.1 Academic literature defines corporate sustainability in
different ways. For example, Dyllick and Hockerts (2002, p. 131) define this concept
as “meeting the needs of a firm’s direct and indirect stakeholders ……, without
compromising its ability to meet the needs of future stakeholders as well”; Eccles and
Serafeim (2013, p. 66) connect it with the society: a sustainable firm “creates value for
its shareholders” and leads to a sustainable society; from the broader perspective, Van
Marrewijk and Werre (2003) and Bansal (2005) and Montiel (2008) elaborate it as a
tridimensional construct that include economic prosperity, environmental integrity and
social equity. Many dominant Australian firms, including ANZ and AGL Energy, are
signatories to the UN Global Compact,2 a network that promotes sustainability; the
Australian Securities Exchange (ASX) also joined the Sustainable Stock Exchanges
Initiative that improves transparency of corporate sustainability. Therefore, corporate
sustainability in Australia is expected to continue to grow in importance.
Corporate sustainability performance is defined as “the extent to which a firm
embraces economic, environmental, social and governance factors into its operations,
and ultimately the impact they exert on the firm and society” (Artiach, Lee, Nelson, &
Walker, 2010, p. 32). As Wood (1991a, 1991b, 2010), Tregidga, Milne, and Kearins
(2014), Global Reporting Initiative (2014), Rao and Tilt (2016) and Guthrie (2016)
suggest, there is a relationship between sustainability disclosure and sustainability
performance: disclosure of sustainability information not only mitigates information
asymmetry between firms and their stakeholders but also holds corporate insiders
accountable. Transparency of corporate sustainability connects with sustainability
disclosure.3 It is considered as “communicating an understanding of how the flows of
material, resources and services between corporations, capital markets, society, the
1 The United Nations Global Compact and the Sustainable Stock Exchanges Initiative are backed up
by the United Nations to promote corporate sustainability. 2 More information about the UN Global Compact in Australia can be found on
http://www.unglobalcompact.org.au/ (access date is 1 July 2019). 3 This thesis uses sustainability disclosure and sustainability reporting interchangeably and does not
distinguish the two terms.
2 Chapter 1: Introduction
economy and the environment affect the mutual ability of those systems to continue
and flourish” (Guthrie, 2016, p.11).
Those charged with the governance of a firm are responsible for the operational
decisions affecting firm performance and are also responsible for communicating
aspects of performance to stakeholders. In the area of sustainability performance,
established frameworks of reporting and disclosure are not necessarily mandated, nor
entrenched. Accordingly, reporting and disclosure of sustainability performance is a
governance choice; increasingly observed through governance mechanisms referred to
as sustainability committee4 or chief sustainability officer (Miller & Serafeim, 2015).
By integrating sustainability with corporate governance, the sustainability committee
is expected to focus on (at least some if not all) sustainability issues on the committee’s
agenda. Aiming to advise the board and management about corporate sustainability
(Peters & Romi, 2014, 2015), the sustainability committee has a quite long (but not
necessarily pervasive) history in Australia. For example, as an early adopter, CSR
Limited formed a relevant committee in 1994, and Arrium Limited formed a similar
committee in 2001.
The remainder of Chapter 1 will expand upon this thesis as follows. Regulatory
background regarding corporate sustainability in Australia is detailed in Section 1.1,
and motivations of the thesis are elaborated upon in Section 1.2. Research purposes
and research questions are in Section 1.3. Contributions and practical implications are
explained in Section 1.4. Findings are reported in Section 1.5. Section 1.6 summarizes
this thesis in the ‘Libby Boxes’ format (Libby, Bloomfield, & Nelson, 2002) and a
roadmap. Chapter 2 reviews identified relevant studies.
1.1 REGULATORY FRAMEWORK
Chapter 2 draws on sustainability literature from the US and Europe, whereas
this thesis investigates the Australian market and context. The regulatory framework
in Australia has similarities and differences with both the US and the European Union,
while this thesis elaborates nuances as pertains to Australia’s regulatory environment.
Australia is arguably more aligned to the regulatory environment of the US than of the
4 Alternative names can include “public policy committee, sustainability committee, corporate social
responsibility committee, environmental health and safety committee, etc” (Peters & Romi, 2015, p.
173).
Chapter 1: Introduction 3
European Union, as the latter is more stringent.5 Internationally mandating
sustainability disclosure, Directive 2014/95/EU has been introduced and enforced by
the European Union, and Directive 2014/95/EU deals with a range of sustainability
issues, including health and safety, pollution emissions, and charity. In contrast, the
US does not impose such comprehensive mandate on sustainability disclosure, and
issue-specific mandates are introduced, including California Transparency in the
Supply Chain Act. In relation to the Asia-Pacific region, several countries use
comprehensive mandate on sustainability disclosure to improve the transparency of
corporate sustainability. For example, Hong Kong introduced mandatory sustainability
disclosure in 2016, namely Appendix 27 of Main Board Listing Rules and Appendix
20 of GEM Listing Rules. Thus, compared with firms operating in the European Union
and the Asia-Pacific region whose regulatory environment is more stringent,
Australian firms remain largely subject to discretionary and voluntary choices in terms
of corporate sustainability disclosure. Although Australian firms do not have
comprehensive mandate on sustainability disclosure, they still face some issue-specific
mandates, which are discussed in the following paragraph. I discuss the Australian
regulatory framework in two parts, one component focuses on sustainability disclosure
and the other on corporate governance and sustainability.
Sustainability disclosure remains voluntary in Australia, and the regulations
regarding sustainability disclosure are evolving. Section 299(1)(f) of the Corporations
Act 2001 was introduced in 1998 to require firms to disclose activities subject to
environmental regulations. Frost (2007) highlights that this section still leaves much
discretionary leeway for managers. Introduced in 2011, Section 1013DA of the
Corporations Act 2001 focuses on product disclosure statements, requiring financial
product issuers to disclose whether labour standards as well as environmental, social
or ethical considerations were considered in the selection, retention or realisation of
the investment. Section 299A of the Corporations Act 2001 was added in 2013, to
require public firms to present their operating and financial review in their directors’
5 United Nations Environment Programme and KPMG (2006) and United Nations Environment
Programme, KPMG, Global Reporting Initiative, and Centre for Corporate Governance in Africa
(2010, 2013, 2016) suggest that firms in the European Union are subject to more stringent regulations
regarding corporate sustainability, and firms in the US are more flexible regarding how to practice and
disclose sustainability. Information about Directive 2014/95/EU can be found at https://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014L0095 (access date is 12 June 2020).
4 Chapter 1: Introduction
reports. The regulatory guide released by the Australian Securities and Investments
Commission articulates: operating and financial review shall contain environmental
and other sustainability risks that may be financially material (see Regulatory Guide
247). Regulatory guides 68 and 65, corresponding to Section 299(1)(f) and 1013DA,
were also issued. It is reasonable to argue that firms in Australia have much discretion
in whether, what and how to disclose sustainability performance.
Regulations with regard to sustainability disclosure outside of corporate reports
are relevant. For example, the National Pollutant Inventory was established in 1998 to
ask operators of all facilities that emit above minimum threshold levels to submit
annual reports which quantify their emissions of various land, air and water pollutants.6
Another example is the National Greenhouse and Energy Reporting Act 2007 – this
Act requires facilities that emit above certain levels of greenhouse gas to report their
emissions.7 In summary, firms need to report their environmental impact to regulators,
if they are above a designated threshold. The social impacts of corporate activities are
also reportable. The Workplace Gender Equality Act 2012 requires firms with 100 or
more staff to submit reports about gender diversity in their workforce.8
To a quite limit extent, financial reporting standards may incidentally require
sustainability disclosure. For example, AASB 6 and 137 are relevant to mining firms,
requiring recognition and disclosure of the restoration costs due to abandoned mine
sites. Thus, this thesis suggests while Australian firms are currently subject to select
regulations about sustainability disclosure, firms continue to retain some flexibility
regarding the scope and content of such disclosure.
The integration of sustainability and corporate governance remains on the
agenda of Australian legislators. An early example of attempts at such integration is
the Corporate Code of Conduct Bill 2000 that attempts to regulate how firms conduct
their business in a socially responsible manner overseas, and it was eventually rejected
in 2002. In 2006, whether and how to better integrate sustainability with corporate
6 More information about the National Pollutant Inventory can be found on http://www.npi.gov.au/
(access date is 1 July 2019). 7 More information about the National Greenhouse and Energy Reporting Act 2007 and Clean Energy
Regulator can be found on http://www.cleanenergyregulator.gov.au/NGER (access date is 1 July
2019). 8 More information about the Workplace Gender Equality Act 2012 and Workplace Gender Equality
Agency can be found on https://www.wgea.gov.au/about-the-agency (access date is 1 July 2019).
Chapter 1: Introduction 5
governance was raised by two committees, namely the Parliamentary Joint Committee
on Corporations and Financial Services9 and Corporations and Markets Advisory
Committee10, and no changes to corporate law were recommended at that time. In
2014, the Governance Institute of Australia11 again invited discussion about whether
clarifications to the relationship between the interests of shareholders and interests of
the corporation should be explicitly made in corporate law, although no actions or
changes followed. Deva (2011) suggests that absence of clarity about the duties of
directors and purpose of the corporation defy attempts to integrate sustainability with
corporate governance at corporate law level. A survey conducted by Anderson et al.
(2006) identifies directors often hold quite diverse and inconsistent views regarding
their duties. To summarise, this thesis suggests that whether and how to integrate
sustainability with corporate governance is largely determined by board of directors in
firms with discretion, and corporate law (nor other regulation) does not explicitly
regulate how firms regard sustainability.
In summary, the regulatory framework in Australia is introduced in two parts:
how sustainability disclosure is regulated, and how sustainability is considered at the
level of corporate law and other regulations. Compared with countries which impose
stringent regulations on sustainability disclosure (e.g. South Africa and the European
Union), Australia grants flexibility in scope and content of sustainability disclosure to
firms. Aligning with other countries (Sjåfjell et al., 2015), Australia does not position
sustainability in corporate governance at the level of corporate law. This thesis argues
that Australian firms have freedom to corporate sustainability. Motivations of this
thesis are elaborated in following section.
1.2 RESEARCH MOTIVATIONS
Policy discussion regarding sustainability disclosure in Australia attracts greater
global scrutiny. Some exchanges in the Asia-Pacific region, including the Hong Kong
Exchange, Singapore Exchange and Taiwan Stock Exchange, have recently mandated
9 This committee published a report, Corporate Responsibility: Managing Risk and Creating Value, in
2006. 10 This committee released a report, The Social Responsibility of Corporations, in 2006. 11 This organization published another report, Shareholder Primacy: Is There a Need for Change, in
2014.
6 Chapter 1: Introduction
sustainability disclosure.12 In Australia, two industry bodies have issued sustainability
disclosure guides.13 More countries, including Argentina and the European Union,
have mandated sustainability disclosure in small and medium-sized firms above a set
of legal threshold.14 Following this momentum of mandated disclosure15, legislators,
regulators, and market operators in Australia are considering whether and how to alter
the current regulatory framework.
The Senate Economics References Committee16 and Australian Securities and
Investments Commission17 emphasize sustainability, climate change and its negative
effects on firms, in their recent public reports. Highlighting concerns of legislators and
regulators, as commissioner of the Australian Securities and Investments Commission,
John Price discusses corporate sustainability as part of directors’ duties and encourages
firms to take into account sustainability in their decision making (McLeod & Hurley,
2018). The fourth edition of Corporate Governance Principles and Recommendations
of the ASX mentions ‘long term sustainable value’ and ‘standing in the community’
to encourage a corporate culture of ‘acting lawfully, ethically and responsibly’.18 Thus,
in examining sustainability disclosure and the role of governance mechanism (the
board committee) regarding sustainability performance, this thesis associates with the
current silo of literature about corporate sustainability in Australia, contributing to this
policy discussion.
As socially responsible/ ethical investment assets in Australia and New Zealand
increased by 247% from 2014 to 2016 to reach $516 billion (Foo, 2017), a reasonable
expectation is that corporate sustainability will attract increasing attention in the future.
Three reasons drive this boom of socially responsible investments in Australia. First,
12 See Listing Rules of corresponding exchanges. 13 Two versions are issued by the Financial Services Council and Australian Council of
Superannuation Investors, one in 2011 and the other in 2015. 14 See the Ley Nº 2594 de Balance de Responsabilidad Social y Ambiental (BRSA) and Directive
2014/95/EU. 15 According to United Nations Environment Programme and KPMG (2006) and United Nations
Environment Programme et al. (2010, 2013, 2016), there is indeed a trend of mandatory disclosure of
corporate sustainability. A recent example is the European Union that mandates disclosure of corporate sustainability in its members. 16 This committee published a report, Carbon Risk: A Burning Issue, in 2017. 17 As the market regulator in Australia, the Australian Securities and Investments Commission
released a report, Climate Risk Disclosure by Australia’s Listed Companies, in 2018. 18 The fourth edition of Corporate Governance Principles and Recommendations of the ASX can be
downloaded from https://www.asx.com.au/regulation/corporate-governance-council.htm (access date
is 10 August 2019).
Chapter 1: Introduction 7
new legislations discussed at Section 1.1, including Section 1013DA and Section 299A
of the Corporations Act 2001, promote investors’ and fund managers’ awareness about
socially responsible investment (Foo, 2017). Secondly, the third edition of Corporate
Governance Principles and Recommendations issued by the ASX further promotes this
awareness by suggesting that listed firms need to evaluate their own exposure to risks
of corporate sustainability and communicate how they manage these risks (Foo, 2017).
Thirdly, this boom of socially responsible investments in Australia also mirrors the
global trend of socially responsible investment (Jones, et al., 2008; Foo, 2017). Pérez-
Gladish, Benson, and Faff (2012), surveying investors sensitive to social responsibility
in Australia, and Eccles, Kastrapeli, and Potter (2017), surveying investors in multiple
countries, identify an upward trend of socially responsible investment and indicate that
investors consider low quality of sustainability disclosure as a key obstacle. Therefore,
greater demand for socially responsible investment needs better disclosure to improve
market efficiency. In this context, Australian firms are expected to prepare more and
better sustainability disclosure. Interviewing stakeholders, KPMG and SustainAbility
(2008) and EY and Global Reporting Initiative (2013) find that more stakeholders
focus on how sustainability is integrated with corporate governance. Thus, examining
corporate sustainability disclosure, the role of the board committee as to sustainability
and sustainability performance, this thesis contributes to the interests of stakeholders:
(1) the reflection as to relationships between disclosure and performance sheds light
on the disclosure quality, a concern to stakeholders; (2) the sustainability committee
may be a solution to integrating sustainability into corporate governance, providing
another perspective to stakeholders in corporate sustainability.
Corporate sustainability generates practitioner and academic research; the extant
literature provides fresh research opportunities. The global surveys of KPMG (2013,
2015, 2017) and the local surveys conducted by Australian Council of Superannuation
Investors (2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017) reveal that more
Australian firms are engaging in sustainability disclosure over time. Using the Global
Reporting Initiative (GRI), Frost, et al. (2005) and Beck, Frost, and Jones (2018) assess
sustainability disclosure by matching disclosure content with the GRI criteria. Taken
together, prior literature19 is interested in research questions about content (e.g. which
19 Readers may refer to Chapter 2 for more information.
8 Chapter 1: Introduction
sustainability themes are reported on, and how much information is released in each
theme). While linguistic characteristics of disclosure have been frequently investigated
in accounting and finance literature, the characteristics in sustainability disclosure are
largely omitted. Identifying this literature gap, Beattie, McInnes, and Fearnley (2004),
Cho, Roberts, and Patten (2010), Beattie (2014), Jain and Jamali (2016) and Loughran
and McDonald (2016) suggest that the literature could benefit from linguistic analysis
of sustainability disclosure, as linguistic analysis can provide additional insights about
how firms communicate their sustainability performance. My thesis aims to contribute
to addressing this literature gap and is motivated to augment prior literature by
investigating sustainability disclosure characteristics using various linguistic
characteristics.
While many studies investigate how corporate governance affects sustainability,
few studies consider specifically how board committees relate to firms’ sustainability
performance (Jain & Jamali, 2016; Walls, Berrone, & Phan, 2012). A research gap of
this group of studies, including Rodrigue, Magnan, and Cho (2013) and Dixon-Fowler,
Ellstrand, and Johnson (2017), is that rich characteristics of sustainability committee,
including composition, authority, resources, and diligence, have been omitted. For
example, in Australian literature, Rankin, Windsor, and Wahyuni (2011) analyse how
the presence of sustainability committee relates to disclosure of carbon dioxide
emissions, revealing that simply the existence of committee does not affect how
Australian firms disclose relevant information. Thus, other meaningful characteristics
of the committee largely are omitted. Following the encouragement of Peters and Romi
(2014, 2015) as well as Dixon-Fowler et al. (2017), my thesis aims to contribute to
addressing this literature gap by investigating the sustainability committee in Australia
with two measures, one focuses on the committee’s presence and the other on
committee effectiveness based on various committee characteristics.
In summary, there are three motivations for this thesis. First, it is motivated by
current and anticipated changes to the regulatory framework in Australia, contributing
to relevant policy discussion. Secondly, it is motivated by the trend that corporate
sustainability continues to grow in importance, delivering the information that matters
to stakeholders. Thirdly, the thesis is motivated by research opportunities highlighted
in prior literature, utilizing linguistic analyses in exploring dimensions of disclosure
and better understanding the role of the sustainability committee in driving corporate
Chapter 1: Introduction 9
sustainability performance. The research purpose and questions are discussed in the
following section.
1.3 RESEARCH PURPOSE AND QUESTIONS
1.3.1 Research Purpose
This thesis aims to examine linguistic characteristics of sustainability disclosure,
firms’ experience of sustainability disclosure and the role of sustainability committees,
which are related to corporate sustainability performance. To be specific, seven textual
characteristics include how much sustainability information, quantitative information
and information about environmental impact are disclosed, to what extent disclosure
is readable, and to what extent disclosure is communicated in optimistic, certain and
clear tones; experience of disclosure is operationalized as number of years that a firm
has disclosed sustainability information; the ESG ratings from the Thomson Reuters
Asset4 (Asset4) are operationalized as sustainability performance; two elements of the
sustainability committee, namely presence and effectiveness, are considered.
This thesis examines these seven textual characteristics for two reasons. First, as
many studies (Cho et al., 2010; Lehavy, Li, & Merkley, 2011; Loughran & McDonald,
2014a; Parker, 2011) suggest, this PhD thesis researches the most frequently-examined
textual characteristics. Secondly, I use Diction 7. The availability of word dictionaries
and analytical software affect which textual characteristics that can be examined. The
ESG ratings from Asset4 are a legitimate data source for sustainability performance,
as demonstrated in many seminal studies (Cheng, Ioannou, & Serafeim, 2014; Ioannou
& Serafeim, 2014, 2016; Lys, Naughton, & Wang, 2015). As DeZoort, Hermanson,
Archambeault, and Reed (2002) instruct, this thesis defines an effective committee as
one that consists of competent members with authority and resources to facilitate board
and management decisions regarding sustainability practices via diligent oversight
efforts and advice.
In summary, selection of which textual characteristics of disclosure are analysed
is decided by prior literature and pragmatic limitations. Use of the Asset4 ESG ratings
follows seminal studies. A focus on the sustainability committee is motivated by
opportunities in prior literature and the rich history of this committee in Australia.
Research questions of this thesis are presented in following section.
10 Chapter 1: Introduction
1.3.2 Research Questions
Three research questions are proposed in relation to the research purpose.
1) Whether and how is an Australian firm’s sustainability
performance associated with its sustainability disclosure?
2) How is experience of disclosure (i.e. number of years as to
sustainability disclosure) related to sustainability performance?
3) How is the sustainability committee related to sustainability
performance? This is operationalized as:
a. How is the presence of a sustainability committee related to
sustainability performance?
b. How is the effectiveness of the sustainability committee
related to sustainability performance?
Regarding the seven textual characteristics, this thesis classifies them to into
three categories. In terms of the extent that sustainability disclosure is readable, this
characteristic can be considered as readability. It reflects costs incurred by readers to
process and interpret disclosure (Lehavy et al., 2011). As tone of language can be
broadly defined as “the affect or feeling of a communication” (Henry, 2006, p. 376),
this thesis groups optimism (Henry & Leone, 2016), certainty (Cho et al., 2010) and
clarity (Resche, 2004, 2015) as tone of language. The remaining characteristics,
namely the amount of disclosure, amount of quantitative information and amount of
information as to environmental impact, are related to the content of sustainability
disclosure. As Hooks and van Staden (2011) and Nazari, Hrazdil and Mahmoudian
(2017) suggest, the amount of disclosure (quantified as the number of words) can be
linked with disclosure comprehensiveness, and environmental-impact information and
quantitative information relate to the content of disclosure.
The purpose of this research and questions are tabulated in Table 1-1. Disclosure
characteristics with regard to content and tones are answered in H1, and readability is
answered in H2 within RQ1. H3 is developed to answer RQ2. H4a and H4b are used
to answer RQ3a and RQ3b, respectively. I acknowledge that this classification in the
previous paragraph is likely challengeable. For example, the amount of sustainability
disclosure arguably relates to readability (Loughran & McDonald, 2014a). Vagueness
or ambiguousness is the opposite of clarity (Resche, 2004, 2015), and may also relate
Chapter 1: Introduction 11
to readability. As all seven textual characteristics are included in Chapter 3, how they
are classified does not affect what has been found or how to interpret those findings.
Contributions of these topics to this thesis are explained in following section.
12 Chapter 1: Introduction
Table 1-1 Summary of Key Components in this Thesis
Research Question
Relevant
Chapter
Hypothesis Theory
Dependent
Variable
Independent
Variable Key Papers
Q1 Whether and how is an
Australian firm’s sustainability
performance
associated with its
sustainability
disclosure?
3 H1 There is no relationship
between sustainability performance and six
textual characteristics of
sustainability disclosure:
a) amount of
information (measured
in number of words),
b) amount of
quantitative information
(measured by the
Diction 7),
c) amount of
environmental impact information (measured
in number of words),
d) tone of optimism
(measured by the
Diction 7),
e) tone of certainty
(measured by the
Diction 7), and
f) tone of clarity
(measured by the
Diction 7).
Signalling theory,
institutional theory and Bloomfield’s
(2002, 2008)
incomplete revelation
hypothesis
Seven textual
characteristics of sustainability
disclosure
Sustainability
performance
Cho et al. (2010),
Clarkson, Overell, and Chapple (2011),
Herbohn, Walker, and
Loo (2014), Arena,
Bozzolan, and Michelon
(2015) and Wang, Hsieh,
and Sarkis (2018)
Chapter 1: Introduction 13
Research Question
Relevant
Chapter
Hypothesis Theory
Dependent
Variable
Independent
Variable Key Papers
H2 Readability of
sustainability disclosure
is positively related to
sustainability
performance.
Q2 How is experience of
sustainability
disclosure related to
sustainability
performance?
4 H3 There is a positive
relationship between a
firm’s sustainability
performance and its
experience of
sustainability disclosure.
Institutional theory Sustainability
performance
Experience of
sustainability
disclosure
Edelman (1992) and
Chandler (2014)
Q3a How is the presence of
a sustainability
committee related to
sustainability
performance?
4 H4a There is no relationship
between the presence of
a sustainability
committee and
sustainability
performance.
Greenwashing
argument and
stewardship theory
Sustainability
performance
Presence of a
sustainability
committee
Forbes and Jermier
(2011) and Rodrigue et
al. (2013)
Q3b How is the
effectiveness of the
sustainability
committee related to
sustainability performance?
4 H4b There is a positive
relationship between
sustainability committee
effectiveness and
sustainability performance.
Resource dependency
theory
Sustainability
performance
Sustainability
committee
effectiveness
DeZoort et al. (2002)
14 Chapter 1: Introduction
1.4 CONTRIBUTIONS
1.4.1 Research Contributions
First, how sustainability disclosure is related to sustainability performance has
been investigated by many studies. For example, Ingram and Frazier (1980) narrowed
the research scope to environmental disclosure and environmental performance in the
US, analysing a sample (1970-1974) to examine this relationship. Such correlation has
also been examined by Australian researchers. For example, Guthrie and Parker (1989)
analysed the sustainability reports of a mining firm (BHP Billiton) between 1885 and
1985, and Deegan, Rankin, and Tobin (2002) analysed reports of BHP Billiton from
1983 to 1997. This silo of literature renders conflicting results in this regard, and these
conflicting results may be attributed to different reasons, including different research
analysis, sample selection and methods of coding environmental disclosure. Instead of
reconciliating the results in prior literature, this thesis contributes to prior literature by
using a different analytical lens, namely linguistic analysis. As Beattie et al. (2004)
and Beattie (2014) encourage, this thesis investigates sustainability disclosure using
linguistic characteristics that have previously been omitted from the literature yet are
frequently examined in accounting and finance literature.
Three US studies, namely Cho et al. (2010), Arena et al. (2015) and Wang et al.
(2018), examine one or two linguistic characteristic(s) of sustainability disclosure (i.e.
optimistic tone and readability). Extending their work, this thesis improves linguistic
analysis of corporate sustainability disclosure in four way. (1) Sustainability disclosure
in different mediums (annual report and standalone report) are included, rather than
only annual reports. (2) Social and environmental reports are included, rather than only
environmental reports. (3) Firms in different industries over 15 years are sampled,
rather than multiple industries in a shorter period. (4) Multiple linguistic characteristics
are investigated at the same time, rather than only a single characteristic. This thesis
therefore provides a more inclusive view of the relationship between performance and
textual characteristics of disclosure, making findings more robust.
Secondly, while the relation between corporate governance and sustainability
has been discussed in a number of studies (Jain & Jamali, 2016), board committees are
less frequently discussed. As a board of directors delegates issues to committees (Reeb
& Upadhyay, 2010), a sustainability committee would exert influence on sustainability
Chapter 1: Introduction 15
performance, acting as nexus between a firm and its own sustainability issues. This
thesis argues that there are many research opportunities in this area of literature. For
example, in relation to sustainability performance, Rodrigue et al. (2013) found no
demonstrable impact of sustainability committee on environmental performance, yet
Dixon-Fowler et al. (2017) found evidence of the positive effects of such a committee
on environmental performance; Peters and Romi (2014, 2015) revealed a sustainability
committee is positively related to the use of assurance services; Liao, Luo, and Tang
(2015) found that this committee is positively related to disclosure of greenhouse gas
emissions. A research gap of this group of studies is that rich characteristics of
sustainability committee (e.g., composition, authority, resources, and diligence), are
largely omitted. My thesis contributes to this expanding field in three ways. (1)
Extending prior studies, it examines various meaningful characteristics of
sustainability committee, including who sit on the committee, and how the committee
members are organized. (2) Aligning with prior literature, it examines the relationship
between the sustainability committee on sustainability performance with a panel data
drawn from firms in various industries. (3) Arguably, there is an absence of relevant
research outside of the US. Rankin et al. (2011) examine how the presence of
sustainability committee affects disclosure of greenhouse gas emissions in Australia.
Extending their work, this thesis examines the sustainability committee from multiple
aspects and different themes of sustainability performance.
1.4.2 Theoretical Contributions
The thesis considers the arguments of several theories, as showed in Table 1-1.
First, following prior studies of how sustainability disclosure relates to sustainability
performance (Clarkson, Li, Richardson, & Vasvari, 2008), Chapter 3 incorporates two
theories, namely signalling theory and institutional theory. Differing from prior
studies, the thesis considers the theories from linguistic perspectives. Secondly, in
relation to readability of sustainability disclosure (a specific linguistic characteristic of
sustainability disclosure examined in Chapter 3), a specific argument is embraced,
namely the incomplete revelation hypothesis (Bloomfield, 2002, 2008), following the
literature of readability of financial information. Extending the hypothesis, this thesis
introduces it into the sustainability literature. Taken together, Chapter 3 assesses which
theories support the findings in the context of linguistic characteristics of sustainability
disclosure and sustainability performance.
16 Chapter 1: Introduction
Thirdly, following prior studies of corporate governance and sustainability, I use
theories to develop hypotheses about H3. For example, the greenwashing argument
from Forbes and Jermier (2011) is used. It argues that corporate governance measures
addressing sustainability (e.g., sustainability committee) tend to be symbolic and lack
substantial effects on sustainability performance. I test this argument with a set of
panel data of sustainability committee in Australia. Fourthly, Chapter 4 includes two
complementing theories, stewardship theory and resource dependency theory, to
interpret findings about the sustainability committee. Thus, Chapter 4 assesses which
the aforementioned theories support the findings in the context of sustainability
committee. Fifthly, institutional theory is considered in Chapter 4 to develop
hypotheses about H2 and to interpret the relationship between firms’ experience of
sustainability disclosure and sustainability performance.
1.4.3 Practical Contributions
This thesis contributes to discussion and debate about anticipated changes to the
regulatory framework in Australia. Findings delivered by this thesis facilitate policy
discussion about how to improve this regulatory framework and therefore encourage
Australian firms to be more sustainable. Second, findings rendered by this thesis
arguably appeal to stakeholders interested in corporate sustainability. For instance,
investors who are interested in socially responsible investing may find this thesis’s
findings useful, as it examines how firms disclose sustainability and utilise a
sustainability committee; as the accounting profession is interested in providing
assurance services regarding sustainability disclosure (Global Reporting Initiative,
2013a), knowledge about corporate sustainability is perceived to improve quality of
assurance services; financial analysts that are interested in socially responsible
investing may find the thesis useful, as it examines the sustainability committee, a
nexus between board of directors/senior management and sustainability issues. Third,
from a broad aspect, this thesis aligns with Bowen (2014) who argues that symbolic
action has social cost; as the resources devoted to potentially symbolic actions, such
as sustainability disclosure and sustainability committee, ought be switched to
substantial action. Even though the resources devoted to sustainability disclosure and
the sustainability committee are bearable by each firm, such resources collectively
could be substantial to society. If they do not deliver substantial benefits to society, it
may be reasonable to reorientate resources to more productive places.
Chapter 1: Introduction 17
In summary, this thesis delivers practical implications in two ways. First, as its
findings suggest, future regulatory framework can pay more attention on readability
of sustainability disclosure. Secondly, as this thesis demonstrates the positive effects
of a sustainability committee on environmental performance, this committee can offer
an opportunity for firms that want to better integrate sustainability with corporate
governance.
This thesis also contributes to prior literature. It enriches knowledge in two key
silos of corporate sustainability, namely the sustainability committee and sustainability
disclosure, using innovative analytical techniques and better research designs. Further,
it considers the arguments of different theories. Findings of the thesis are summarized
in following section.
1.5 SUMMARY OF THE FINDINGS
The first research question is about whether and how an Australian firm’s
sustainability performance is associated with its sustainability disclosure. Analysing
2,076 firm-year observations between 2002 and 2016, this thesis finds a positive
correlation between selected textual characteristics and sustainability performance. In
other words, good performers release more sustainability disclosure, more quantitative
information, more environmental-impact information and present in optimistic, certain
and clear tones. Analysing 2,067 firm-year observations (2002 – 2016), this thesis
demonstrates that good performers communicate in a more readable way.
Extending prior literature, this thesis performs some robustness tests, including
an alternative performance measurement (by principal component analysis), disclosure
channels, sectoral environment, the Granger causality tests in relation to dependent
and independent variables, and time stability. Findings rendered by main analysis
remain qualitatively unchanged when compared with an alternative performance
measurement. As sustainability disclosure is extracted from a standalone report or
annual report, it is interesting to see whether the findings are affected by disclosure
channels. This thesis reveals different channels do influence relationships between
textual characteristics and performance. In terms of sectoral environments, this thesis
shows that different sectoral environments affect how sample firms communicate
sustainability. As this thesis includes a sample period of 15 years, it was interesting to
check if findings remained stable over time. Different sample periods are found to
18 Chapter 1: Introduction
affect the relationship between textual characteristics and performance. The Granger
causality tests confirm that textual characteristics in one period do not relate to
performance in the next period, and vice versa.
The second research question asks how firms’ experience of disclosure is related
to their sustainability performance. Analysing 2,076 firm-year observations from 2002
to 2016, this thesis reveals a positive relationship between experience of disclosure
and performance. The third research question asks how the sustainability committee is
related to sustainability performance. Analysing 2,166 firm-year observations based
on the same period, this thesis finds that there is a positive relationship between the
existence of a sustainability committee and sustainability performance; sustainability
committee effectiveness is positively related to environmental performance.
Extending prior literature, this thesis performs some robustness tests, including
endogeneity, alternative performance measurements (nine sub-categories of the ESG
ratings), sectoral environment and time stability. Regarding endogeneity, dynamic
generalised-method-of-moments (GMM) and propensity score matching (PSM) are
used, and findings rendered by this thesis remain qualitatively unchanged. Regarding
alternative performance measurements, the findings remain qualitatively unchanged.
In terms of sectoral environment, I find that different sectoral environment influences
effects of sustainability committee on performance. As this thesis includes 15 years in
sample period, it is interesting to check whether findings remain stable over time.
Different sample periods are found to not affect the relationship between committee
and performance. This thesis’s structure is presented in following section.
1.6 THESIS OUTLINE
Chapter 1 presents an overview of this thesis. Chapter 2 discusses various silos
of literature that are related to research questions. Chapters 3 and 4 execute the research
designs to answer research questions proposed in Chapter 1. Chapter 5 concludes this
thesis by summarizing Chapters 2, 3 and 4, whilst discussing limitations and avenues
for future research. As Libby, Bloomfield and Nelson (2002) suggest, ‘Libby Boxes’
are presented in Figure 1-1 to demonstrate research designs, and Figure 1-2 follows to
provide a roadmap.
Chapter 1: Introduction 19
Figure 1-1 Libby Boxes for Research Questions
20 Chapter 1: Introduction
Chapter 1: Introduction 21
22 Chapter 1: Introduction
Chapter 1: Introduction 23
Chapter 1: Introduction 25
Figure 1-2 Thesis Roadmap
Chapter 2: Literature Review 27
Chapter 2: Literature Review
As mentioned in Section 1.4.2, there are many studies that investigate corporate
sustainability from diverse perspectives in countries. Prior studies specifically relevant
to Chapters 3 and 4, respectively, are reviewed in each chapter, and other studies are
reviewed in Chapter 2 to facilitate understanding about how this thesis is positioned
within wider literature surrounding corporate sustainability. Chapter 2 discusses the
pertinent studies regarding sustainability disclosure and sustainability performance in
Section 2.1. Linguistic studies about financial information that inspired this thesis are
discussed in Section 2.2. Section 2.3 considers studies of corporate governance and
sustainability performance, and Section 2.4 reviews studies specific to governance and
sustainability disclosure. Section 2.5 accounts recent literature development from 2014
to 2018 in Australia. Chapter 3 reports original research into textual characteristics of
disclosure and performance.
2.1 SUSTAINABILITY DISCLOSURE AND SUSTAINABILITY
PERFORMANCE
If sustainability disclosure is defined as the “process of communicating the social
and environmental effects of organisations” (Gray, Owen & Adams, 1996, p.3), it and
sustainability performance ought to be coupled – the former should present a true and
fair view of the latter. But prior studies in diverse countries seem to contradict this
idea. Section 2.1 tabulates seminal studies into the relationship between sustainability
disclosure and sustainability performance.
28 Chapter 2: Literature Review
Table 2-1 Overview of Seminal Studies about the Relationship between Sustainability Disclosure and Sustainability Performance Author(s) –Year Country Measurement on Sustainability
Disclosure
Measurement on Sustainability Performance Result
Panel A – Environmental Disclosure and Environmental Performance
[1] Ingram and Frazier
(1980)
US Environmental disclosure – extent of
disclosure
Environmental performance – CEP indices None
[2] Freedman and Jaggi
(1982)
US Environmental disclosure – extent of
pollution disclosure
Environmental performance – CEP indices None
[3] Deegan and Rankin
(1996)
Australia Environmental disclosure – length of
disclosure
Environmental performance –success of prosecution Negative
[4] Fekrat, Inclan, and
Petroni (1996)
18 countries Environmental disclosure – extent of
disclosure
Environmental performance – CEP indices None
[5] Brown and Deegan
(1998)
Australia Environmental disclosure – length of
disclosure
Environmental performance –number of media articles
reporting on corporate environmental performance
Negative
[6] Neu, Warsame, and
Pedwell (1998)
Canada Environmental disclosure – length of
disclosure
Environmental performance – environmental fines levied
against firm and number of articles that had environmental
criticisms of corporate activities
Positive and
Negative
Chapter 2: Literature Review 29
Author(s) –Year Country Measurement on Sustainability
Disclosure
Measurement on Sustainability Performance Result
[7] Cormier and Magnan
(1999)
Canada Environmental disclosure – extent of
disclosure
Environmental performance – excess pollution, fines and
penalties, orders to conform or legal actions
None
[8] Hughes, Anderson,
and Golden (2001)
US Environmental disclosure – extent of
disclosure
Environmental performance – CEP indices None
[9] Patten (2002) US Environmental disclosure – extent of
disclosure
Environmental performance – toxic release inventory
adjusted by revenue
Negative
[10] Al-Tuwaijri,
Christensen, and Hughes
(2004)
US Environmental disclosure – extent of
disclosure
Environmental performance –ratio of toxic waste recycled
to total toxic waste generated
Positive
[11] Freedman and Jaggi
(2004)
US Environmental disclosure – extent of
climate change disclosure
Environmental performance – actual emissions Positive
[12] Cho and Patten
(2007)
US Environmental disclosure – extent of
disclosure
Environmental performance – 2002 KLD ratings Negative
[13] Clarkson et al.
(2008) US Environmental disclosure – extent of
disclosure
Environmental performance – toxic release inventory
adjusted by sales Positive
30 Chapter 2: Literature Review
Author(s) –Year Country Measurement on Sustainability
Disclosure
Measurement on Sustainability Performance Result
[14] Aerts and Cormier
(2009)
US and Canada Environmental disclosure – extent of
disclosure
Environmental performance – toxic release inventory None
[15] Freedman and Jaggi
(2009)
European Union,
Japan and Canada
Environmental disclosure – extent of
disclosure
Environmental performance – carbon emission None
[16] Cho et al. (2010) US Environmental disclosure – tone of
language
Environmental performance – 2002 KLD ratings Negative
[17] Clarkson et al.
(2011)
Australia Environmental disclosure – extent of
disclosure
Environmental performance – pollution propensity Positive
[18] De Villiers and van
Staden (2011)
US Environmental disclosure – length of
disclosure
Environmental performance – KLD and toxic release
inventory
Negative
[19] Kim and Lyon
(2011)
US Environmental disclosure – reported
emissions under the section 1605(b) of the
Energy Policy Act 1992
Environmental performance – actual emissions Negative
[20] Toffel and Short
(2011) US Environmental disclosure – whether a
facility voluntarily discloses to the
Environmental Audit Policy
Environmental performance – abnormal release of toxic
chemicals Positive
Chapter 2: Literature Review 31
Author(s) –Year Country Measurement on Sustainability
Disclosure
Measurement on Sustainability Performance Result
[21] Cho, Freedman, and
Patten (2012)
US Environmental disclosure – disclosure of
environmental capital spending amount
Environmental performance – changes in toxic release
inventory
Negative
[22] Cho, Guidry,
Hageman, and Patten
(2012)
US Environmental disclosure – extent of
disclosure
Environmental performance – environmental impact score
reported by Newsweek
Negative
[23] Hassan and Kouhy
(2013)
Nigeria Environmental disclosure – length of
disclosure
Environmental performance – carbon emissions None
[24] Luo and Tang
(2014)
US, UK and
Australia
Environmental disclosure –under CDP intensity of emissions and carbon mitigation under CDP Positive
[25] Herbohn et al.
(2014)
Australia Environmental disclosure – extent of
disclosure
Environmental performance – information extracted from
corporate disclosure
Positive
[26] Meng, Zeng, Shi,
Qi, and Zhang (2014)
China Environmental disclosure – extent of
disclosure
Environmental performance – firms listed by Ministry of
Environment as serious offenders
Non-linear
[27] Arena et al. (2015) US Environmental disclosure – tone of
language
Environmental performance – number of environmental
concerns listed by KLD Positive
32 Chapter 2: Literature Review
Author(s) –Year Country Measurement on Sustainability
Disclosure
Measurement on Sustainability Performance Result
[28] Cormier and
Magnan (2015)
Canada and US Environmental disclosure – extent of
disclosure
Environmental performance – toxic release inventory and
national pollution release inventory
None
[29] Braam, de Weerd,
Hauck, and Huijbregts
(2016)
Netherland Environmental disclosure – extent of
disclosure
Environmental performance – greenhouse gas emissions,
production of waste and total water consumption
Negative
Panel B – Sustainability Disclosure and Sustainability Performance
[30] Lanis and
Richardson (2012a)
Australia Sustainability disclosure – length of
disclosure
Tax aggressiveness – a firm has been accused of tax
aggressiveness by the ATO, resulting in the issue of an
amended tax assessment
Positive
[31] Lanis and
Richardson (2012b)
Australia Sustainability disclosure – extent of
disclosure
Tax aggressiveness – a firm’s effective tax rate Positive
[32] Wang et al. (2018) US Sustainability disclosure – readability of
disclosure
CSR performance – ESG and KLD ratings Positive
Chapter 2: Literature Review 33
Table 2-1 includes several prior studies that examined the relationship between
sustainability disclosure and sustainability performance. As indicated in this table, this
chapter suggests that they focus on thematic content in disclosure, and other disclosure
characteristics are comparatively omitted in the literature. Of the studies analysed in
this table, eight investigate this relationship in Australia. Five studies, [17], [24], [25],
[30] and [31], found a positive relationship, and three, [3], [4] and [5], concluded with
a negative result no correlation at all. Such non-consensus status is also reflected by
studies conducted in other countries. For example, of the 14 studies investigating the
US data, only five conclude a positive relationship. Literature-review or meta-analysis
studies were consulted to see how this relationship is reflected in the wider literature.
Ullmann (1985) included seven studies about this relationship and found that
contradictory results can be due to an absence of theory, inappropriate definitions or
lack of empirical data. Berthelot, Cormier, and Magnan (2003) and Alrazi, De Villiers,
and van Staden (2015) document that this relationship is negative. Following analysis
of 186 studies over decades, Fifka (2012, 2013) concluded that the available literature
produces mixed results regarding this relationship. Synthesizing 178 studies from 1999
to 2011, Hahn and Kühnen (2013, p. 16) confirm Fifka’s (2012, 2013) conclusion and
suggest further studies are encouraged to understand whether sustainability disclosure
“conveys a true and fair view of corporate sustainability performance”.
In summary, as Table 2-1 suggests, there is an extant mature body of literature
investigating the relationship between sustainability disclosure and sustainability
performance. But prior studies do not reach a clear consensus about this important
topic, leaving many opportunities for future studies. Chapter 3 further investigates this
body of studies. Linguistic studies into readability and tone of language in financial
information are reviewed in Section 2.2.
2.2 LINGUISTIC STUDIES ABOUT FINANCIAL INFORMATION
As suggested by Li (2010b) and Loughran and McDonald (2016), the linguistic
studies into financial information have been identified. In addition to thematic content
of sustainability disclosure, this thesis also considers two linguistic characteristics (i.e.
readability and tone of language) of disclosure. Thus, the linguistic studies into the two
characteristics in financial information are discussed, respectively.
34 Chapter 2: Literature Review
2.2.1 Readability
As a linguistic phenomenon, readability has a long history (DuBay, 2004). It has
long been investigated by researchers in the field of accounting. For example, Smith
and Smith (1971) measure the readability of annual reports made by US firms. As
defined in Dale and Chall (1949, p. 5), readability concerns “the sum total (including
all the interactions) of all those elements within a given piece of printed material that
affect the success a group of readers have with it. The success is the extent to which
they understand it, read it at an optimal speed, and find it interesting”. Within the field
of accounting, Lehavy, Li, and Merkley (2011, p. 1091) define it as “the costs incurred
by users to process and interpret a firm’s written communication”.
There are two stages in the development of readability studies in the accounting
literature (Loughran & McDonald, 2016). Following the review of early studies into
the readability of financial information, Jones and Shoemaker (1994), Courtis (1995),
Merkl-Davies and Brennan (2007), Brennan, Guillamon-Saorin, and Pierce (2009), Li
(2010b) and Merkl-Davies, Brennan, and Vourvachis (2011) identified that: studies at
the first stage are mixed20 and sampled a quite limited number of firms.
Li (2008) is a typical study at the second stage. After analysing the data of 55,719
firm-years between 1994 and 2004, Li (2008) identified that changes in readability of
managerial-discussion-and-analysis section (measured by number of words and the
Fog index) relate to financial performance and to earnings persistency. Subsequent to
Li (2008), other researchers explored how readability of financial information can be
related to other variables. For instance, You and Zhang (2009) and Lee (2012) looked
into whether and how readability of annual reports is related to information efficiency
of share prices, Miller (2010) and Franco, Hope, Vyas, and Zhou (2015) analysed how
readability of annual reports is related to trading volumes, and Bonsall and Miller
(2016) and Ertugrul, Lei, Qiu, and Wan (2017) link readability of annual reports with
costs of borrowing.
20 For example, Subramanian, Insley, and Blackwell (1993), Ober, Zhao, Davis, and Alexander
(1999), Rutherford (2003) and Henry (2006) render inconsistent outcomes about relationship between
firm performance and readability of annual reports.
Chapter 2: Literature Review 35
In addition to annual reports, other types of information are explored by prior
studies. For example, Brochet, Naranjo, and Yu (2012) examined the relationship
between the readability of conference calls and trading volumes, and Bradbury, Hsiao,
and Scott (2018) analysed the readability of summary annual reports issued by local
governments in New Zealand. Regarding methodology, behavioural experimentation
was used by Rennekamp (2012) and Lawrence (2013) to investigate how readability
of financial information can shape the decision-making process of investors. It is
reasonable to suggest that the readability of literature exponentially grew after the
research conducted by Li (2008).21 In analysing readability of sustainability disclosure,
this thesis arguably contributes to this body of studies.
2.2.2 Tong of Language
As a linguistic phenomenon, tone of language is defined as “the affect or feeling
of a communication” (Henry, 2006, p. 376). Kearney and Liu (2014, p. 172) consider
textual tone as “the degree of positivity or negativity in texts”. It has been investigated
in three types of disclosure, namely corporate disclosure, media articles and internet
posting (Kearney & Liu, 2014). As most of studies about tone of language investigate
it in financial information, this thesis places importance on how it is operationalized
by prior studies. Henry and Leone (2016) identify that there are two approaches in
current literature, namely word frequency and machine learning. It is noteworthy that
Kearney and Liu (2014) already give a comprehensive review of how tone of language
is measured.
Many studies operationalize tone of language in financial information based on
word-frequency measures/ dictionary-based measures/ bag-of-words measures. Such
measures are based on “a mapping algorithm in which a computer program reads text
and classifies the words, phrases or sentences into groups based on pre-defined
dictionary categories” (Kearney & Liu, 2014, p. 175). Two programs, namely General
Inquirer and Diction, are frequently used in analysis of relevant literature. For
example, Tetlock, Saar-Tsechansky, and Macskassy (2008), Loughran and McDonald
21 For example, a number of readability studies, including You and Zhang (2009), Biddle, Hilary, and
Verdi (2009), Moffitt and Burns (2009), Miller (2010), Lehavy et al. (2011), Brochet et al. (2012),
Lee (2012), Rennekamp (2012), Lawrence (2013), Loughran and McDonald (2014b), Jennings, Seo,
and Tanlu (2014), Bozanic and Thevenot (2015), Lang and Stice-Lawrence (2015), Franco et al.
(2015), Bonsall and Miller (2016), Guay, Samuels, and Taylor (2016) and Bushee, Gow, and Taylor
(2017), are performed.
36 Chapter 2: Literature Review
(2011) and Yukselturk and Tucker (2015) utilised the General Inquirer program, and
Henry (2006), Cho et al. (2010), Craig and Brennan (2012), Davis, Piger, and Sedor
(2012), Davis and Tama-Sweet (2012) and Arena et al. (2015) used the Diction
program. In addition to these two dominant computer programs, other programs are
used. For instance, the Oxford Concordance Program is used by Smith and Taffler
(2000), manual analysis is used by Lang and Lundholm (2000), Li (2006) and
Schleicher and Walker (2010), a customised program was developed by Abrahamson
and Park (1994), and Demers and Vega (2010) jointly apply both Diction and General
Inquirer.
In addition to word-frequency measures or dictionary-based measures or bag-of-
words measures, different machine-learning measures22 are used in current literature.
Antweiler and Frank (2004, 2006), Das and Chen (2007) and Li (2010a) use machine-
learning measures to analyse tone of language in a range of disclosure formats,
including online posting, news articles and forward-looking statements, respectively.
This expanding literature has two concerns when it comes to measuring the tone of
language. First, which measure should be used: does bag-of-words or machine-
learning function better? Henry and Leone (2016, p. 155) conclude that there are
“minimal differences in the power of the tests across these alternative tone measures”.
Secondly, which term weighting, equal/proportional, works better? Henry and Leone
(2016) find that equal or proportional weighting does not distort findings. By analysing
the tone of language in sustainability disclosure, the thesis extends this silo of linguistic
literature from financial information to sustainability disclosure. In the following
section, prior studies about corporate governance and sustainability performance are
reviewed.
2.3 CORPORATE GOVERNANCE AND SUSTAINABILITY
PERFORMANCE
Whether and how to integrate sustainability with corporate governance depends
on how sustainability is related to firm performance – if sustainability undermines firm
performance, there is no need to incorporate sustainability into corporate governance.
In the examined literature, many studies into sustainability performance and firm
22 Machine-learning measures are defined as “statistical techniques to infer the content of documents
and to classify them based on statistical inference” (Kearney & Liu, 2014, p. 175).
Chapter 2: Literature Review 37
performance were undertaken. Thus, this section consults meta-analysis and literature-
review studies to better understand how sustainability performance associates with
firm performance. As found by Pava and Krausz (1996), Margolis and Walsh (2001),
Orlitzky, Schmidt, and Rynes (2003), Allouche and Laroche (2005), De Bakker,
Groenewegen, and Den Hond (2005), Margolis, Elfenbein, and Walsh (2007), Orlitzky
(2008), Van Beurden and Gössling (2008), Stefan and Paul (2008), Molina-Azorín,
Claver-Cortés, López-Gamero, and Tarí (2009), Schreck (2009), Horváthová (2010),
Albertini (2013), Goyal, Rahman, and Kazmi (2013), Endrikat, Guenther, and Hoppe
(2014), Lu, Chau, Wang, and Pan (2014), Friede, Busch, and Bassen (2015), Malik
(2015) and Wang, Dou, and Jia (2015), there is a positive link between sustainability
performance and firm performance.
Moreover, many meta-analysis and literature-review studies, including Orlitzky
and Benjamin (2001), Godfrey (2005), Husted (2005), Godfrey, Merrill, and Hansen
(2009), Minor and Morgan (2011), Oikonomou, Brooks, and Pavelin (2012), Jo and
Na (2012), Albuquerque, Durnev, and Koskinen (2013), Mishra and Modi (2013),
Bouslah, Kryzanowski, and M’Zali (2013), Sun and Cui (2014), Koh, Qian, and Wang
(2014), Harjoto and Laksmana (2016), Al‐Hadi, Chatterjee, Yaftian, Taylor, and
Monzur Hasan (2017) and Lins, Servaes, and Tamayo (2017), find that sustainability
performance is negatively related to firm risks. In summary, prior studies indicate that
it is beneficial to incorporate sustainability into corporate governance, as sustainability
improves firm performance and mitigates firm risks.
In extant literature, venues to integrate sustainability with corporate governance
are discussed. Regarding the role of the board of directors, prior studies do not reach
consensus (Jain & Jamali, 2016). On one side, some studies, including Huang (2010)
who analysed 297 electronics firms in Taiwan, Sánchez, Sotorrío, and Díez (2011)
who sampled 125 firms in Spain, and Walls et al. (2012) who tested 2,002 firm-year
observations in the US, found that a board of directors which better serves the interests
of shareholders, also has positive associations with sustainability performance.
Contrastingly, other studies, including Cespa and Cestone (2007), Surroca and Tribó
(2008) and Chintrakarn, Jiraporn, Kim, and Kim (2016), suggest that sustainability
performance is related to managerial discretion and entrenchment. In other words, a
board of directors that does not diligently serve the interests of shareholders
encourages sustainability performance. Thus, whether a board of directors is an asset
38 Chapter 2: Literature Review
to the integration of sustainability with corporate governance is in debate. This thesis
improves this silo of studies by exploring whether and how a board committee can be
an avenue to better integrate sustainability with the decision-making at senior level
and contribute to better sustainability performance. In Section 2.4, prior studies about
corporate governance and sustainability disclosure are discussed.
2.4 CORPORATE GOVERNANCE AND SUSTAINABILITY DISCLOSURE
Corporate governance focuses on how to moderate the behaviour of boards and
senior executives (Mees & Smith, 2019), and corporate governance can be reduced to
issues of regulation and disclosure. Instructed by Jain and Jamali (2016), this section
tabulates seminal studies about the relationship between corporate governance and
sustainability disclosure. It is reasonable to suggest that this thesis just covers a fraction
of the relevant literature.
Chapter 2: Literature Review 39
Table 2-2 Overview of Seminal Studies about Relationship between Sustainability Disclosure and Corporate Governance Author(s) –Year Country Measurement on Sustainability
Disclosure
Measurements on Corporate
Governance
Result
[1] Prado-Lorenzo and
Garcia-Sanchez (2010)
28 countries Scores assigned by the Carbon
Disclosure Project about disclosure of
greenhouse gas emissions
Board independence, CEO duality
and gender diversity of board
Negative or no relationship between
corporate governance and disclosure
are found
[2] Frias‐Aceituno,
Rodriguez‐Ariza, and
Garcia‐Sanchez (2013)
15 countries Different types of disclosure:
financial disclosure only, financial
disclosure and corporate social
responsibility disclosure, and
integrated disclosure
Board size, board independence,
meeting frequency and gender
diversity of board
Board size and gender diversity are
found to be positively related to the
use of corporate social responsibility
disclosure and integrated disclosure
[3] Khan, Muttakin, and
Siddiqui (2013)
Bangladesh Disclosure index Board independence, CEO duality,
presence of audit committee
Board independence and the presence
of an audit committee are found to be
positively related to disclosure
[4] Ntim and Soobaroyen
(2013) South Africa Length of black economic
empowerment disclosure (measured
in number of words)
Board size, board independence,
CEO duality and board diversity
Board size, board independence and
board diversity are positively related
to disclosure
[5] Amran, Lee, and Devi
(2014)
12 countries Disclosure index Board size, board independence, gender diversity of board and
presence of corporate social
responsibility committee
Only the presence of a corporate social responsibility committee is
found to be positively related to
disclosure
40 Chapter 2: Literature Review
Author(s) –Year Country Measurement on Sustainability
Disclosure
Measurements on Corporate
Governance
Result
[6] Fernandez‐Feijoo,
Romero, and Ruiz‐Blanco
(2014)
22 countries Scores assigned by the KPMG
International Survey of Corporate
Social Responsibility Reporting
(2008)
Gender diversity of board (at least
three women on board)
Gender diversity of the board is found
to be positively related to length of
disclosure
[7] Jizi, Salama, Dixon, and
Stratling (2014)
US Disclosure index Board size, board independence,
meeting frequency and CEO
duality
Board size, board independence,
meeting frequency and CEO duality
are found to be positively related to
disclosure
[8] Jizi (2017) UK Disclosure index Board size, board independence,
gender diversity of board and CEO
duality
Board independence and gender
diversity of board are found to be
positively related to disclosure
Chapter 2: Literature Review 41
In order to depict a relatively comprehensive picture about relationship between
corporate governance and sustainability disclosure, this thesis includes four studies at
international level (i.e. [1], [2], [5] and [6]). It is noteworthy that international studies
do not reach a consensus about this relationship. For example, Amran, Lee, and Devi
(2014) report gender diversity does not exert influence on sustainability disclosure, yet
Fernandez‐Feijoo, Romero, and Ruiz‐Blanco (2014) find the effect of gender diversity.
As Table 2-2 shows, four studies at national level (i.e. [3], [4], [7] and [8]) suggest that
there is a positive relation between corporate governance and sustainability disclosure.
Taken together, inclusion of corporate governance characteristics in a research design
can make the design more robust, and future studies with regard to this relationship
are encouraged. As many studies are not included in this chapter, literature-review or
meta-analysis studies are consulted to check how this relationship is reflected in the
literature. Informed by Dienes, Sassen, and Fischer (2016), Jain and Jamali (2016) and
Rao and Tilt (2016) who comprehensively considered relevant studies, this chapter
concludes that there is no true consensus in terms of how corporate governance (e.g.
ownership structure and board of directors) relates to sustainability disclosure. Future
research is expected to therefore explore many opportunities in this field. In Section
2.5, Australian studies (2014 – 2018) published on nine regional accounting journals
are retrieved and reviewed.
2.5 CORPORATE SUSTAINABILITY: AUSTRALIAN EVIDENCE SINCE
2014
As my research setting is Australia, this final section of Chapter 2 (Section 2.5)
provides a survey of the relevant corporate sustainability/ social responsibility studies
that examine how Australian firms react to various incentives and pressures to conduct
sustainability practice. Inspired by Benson, Clarkson, Smith, and Tutticci (2015) who
reveal corporate sustainability/ social responsibility is one of seven major fields where
accounting research has impacted practices, Section 2.5 updates this silo of literature
by reviewing relevant studies since 2014 in the same nine nominated journals:23
Accounting, Auditing and Accountability Journal (AAAJ);
23 I recognise that relevant Australian studies may be published in other journals, such as Business
Strategy and Environment, Journal of Cleaner Production, Journal of Business Ethics and Accounting
and Business Research. But I have retained the same scope of accounting journals as recognised by
Benson, et al. (2015) as the journals’ influence in the accounting discipline in Australia.
42 Chapter 2: Literature Review
Australian Accounting Review (AAR);
Abacus (Abacus);
Accounting and Finance (AF);
Australian Journal of Management (AJM);
Accounting Research Journal (ARJ);
Journal of Contemporary Accounting and Economics (JCAE);
Managerial Auditing Journal (MAJ);
and Pacific Accounting Review (PAR).
Note, here and throughout this study, these journals are presented alphabetically
according to their widely used abbreviations, and no hierarchy is intended or implied
by this ordering.
I inputted keywords, including Australia*, sustain*, social*, envir* and different
combinations of various keywords, into EBSCOhost, Scopus and ProQuest databases
to retrieve the studies that meet all following criteria:
(1) They are published on the aforementioned nine accounting journals;
(2) They are published between 2014 and 2018;
(3) They examine corporate sustainability/social responsibility at firm level;
(4) They are not literature review studies or editorials.
After manually screening the searching outcomes, there are 54 studies that meet
all four criteria. Basic information about these 54 studies is presented below. As Table
2-3 shows, AAAJ, AAR and AF are the top three journals that publish accounting
studies with regard to corporate sustainability/social responsibility using or including
Australian data between 2014 and 2018; and the number of publications gradually
increased over this period of time.
Chapter 2: Literature Review 43
Table 2-3 Basic Information about 54 Studies from 2014 to 2018 in Nine Designated
Accounting Journals Panel A – Journal of Publications
Journal of Publications Number of Publications
AAAJ 14 AAR 11
ABACUS 1
AF 8
AJM 5
ARJ 5
JCAE 2
MAJ 3
PAR 5
Panel B – Year of Publications
Year of Publications Number of Publications
2014 7
2015 8
2016 8
2017 16 2018 15
As Table 2-4 presents, firms’ sustainability disclosure is the most examined topic
(23 studies), followed by sustainability performance (14 studies). In addition to these
two topics, economic consequence and corporate governance with regard to corporate
sustainability also attract much attention. The research themes of these 54 studies are
shown in Panel A of Table 2-5, and research methods used are presented in Panel B of
Table 2-5. As Panel A of Table 2-5 shows, the most researched theme is corporate
sustainability/ social responsibility (31.48%) and climate change/carbon (as a sub-
category of corporate sustainability) also attracts much attention (24.07%). As Panel
B of Table 2-5 presents, regression is the most frequently used method, and qualitative
methods also are frequently used.
44 Chapter 2: Literature Review
Table 2-4 Summary of 54 Studies from 2014 to 2018 on Nine Designated Accounting Journals Code Journal Name (Year) Research Aim(s) / Question(s) Key Findings
[1] PAR Canny (2014) The annual report disclosure of contributions by
Australian firms to the relief appeal in context of the
South-East Asian tsunami of 26 December 2004
• There is a strong relationship between public awareness of
the contributions and disclosing behaviour;
• Firm size and profit are related to some aspects of
disclosure;
• There is no relationship between size of the cash donation
and disclosing behaviour.
[2] AAAJ Egan (2014) How were a heterogeneous range of water efficiency
responses driven across a field of seven water consuming
organisations in Australia at a time of acute drought
conditions into the late 2000s?
• A loosely coordinated range of drivers motivated
pervasive water efficiency responses in few case
organisations;
• Would-be leader organizations sought to invoke a water efficiency field;
• While the field lacked effective champions for change, an
institutionalisation of novel water efficiency practices
continued across the field into 2010.
[3] PAR Hazelton (2014) The labelling of the water footprint of products in an
Australian context • Water footprint reporting could make a significant
contribution to public water literacy;
• Labelling of complex products is currently infeasible, but
existing and emerging solutions may make it possible in
the future.
[4] ABACUS Herbohn, Walker, and
Loo (2014)
The relationship between sustainability performance and
sustainability disclosure within the Australian extractive
industries
• There is a positive relationship between sustainability
performance and sustainability disclosure in the
Australian extractive industries.
[5] PAR Luo and Tang (2014a) The impact of the proposed carbon tax on the financial
market return of Australian firms, and the differential tax
effect on individual firms with different carbon profiles
• The proposed tax has negative impact on shareholder
wealth in Australia;
• The most significant effect is found in the materials,
industrial and financial sectors;
Chapter 2: Literature Review 45
• A firm’s direct carbon exposure is found to be
significantly related to abnormal returns, yet its indirect
exposure is not;
• The influence of proposed carbon tax is more notable
during the early stages of the development of the carbon
tax.
[6] JCAE Luo and Tang (2014b) Whether voluntary carbon disclosure reflects international
firms’ true carbon performance? • There is a positive relationship between carbon disclosure
and carbon performance, suggesting that firms’ voluntary
carbon disclosure in the Carbon Disclosure Project is
indicative of their underlying actual carbon performance.
[7] AAR Tang and Luo (2014) The implementation of carbon management systems by
large Australian firms • For firms that have higher quality carbon management
systems, they achieved better carbon mitigation;
• The most effective elements of carbon management
systems include adequate assessment of carbon risk and
opportunity, the presence of reduction targets, the strength
of carbon programs and enhanced external disclosures.
[8] AAR Fernandez‐Feijoo,
Romero, and Ruiz
(2015)
Factors that explain the decision of intranational firms to
assure their sustainability disclosure and of the choice of a
Big 4 auditor as assuror
• A European Union country affects the decision of a firm
to have sustainability disclosure externally assured and
hire a Big 4 as assurance provider;
• Industry affiliation, firm size, listed status and Global
Reporting Initiative application level are related to use of
external assurance;
• Industry affiliation, firm size, listed status, use of integrate
reporting and Global Reporting Initiative application level
are related to employment of a Big 4 as assurance
provider.
[9] AF Linnenluecke, Birt,
Lyon, and Sidhu
(2015)
Implications of changes in planetary boundary conditions
for increasing the risks of impairment that are contingent
on the impacts of breaches or violations of planetary boundaries with a consequent loss of a social or regulatory
licence to operate
• The Australian top 10 metals and mining firms by market
capitalisation in the 2013/2014 year would encounter
averaged $1.144 billion of impairment loss.
46 Chapter 2: Literature Review
[10] AF Loh, Deegan, and
Inglis (2015)
The corporate social and environmental disclosure
practices of a sample of gambling firms operating within
Australia in time of three specific interrelated Australian
government initiatives
• Corporate social and environmental disclosure is a
response to social pressures created around the time of
these initiatives.
[11] AAR Martínez-Ferrero,
Gallego-Álvarez, and
García-Sánchez (2015)
The connection and possible bidirectional relationship
between corporate social responsibility and earnings
management
• The existence of an inverse bidirectional relationship
between corporate social responsibility and earnings
management;
• This bidirectional relationship is more important in
countries where there is significant institutional pressure with regard to corporate social responsibility and in
countries with greater investor protection.
[12] AAAJ O'Neill, McDonald,
and Deegan (2015)
Whether the different procedures for organising subsets of
a set of accounting data may lead to different conclusions
about (the same) reality?
• The authors demonstrate that different representations of
reality may result not only from accounting choices as to
“what” is measured, but also from accounting choices as
to “how subsets of measured data are organised”.
[13] MAJ Soh and Martinov-
Bennie (2015)
The nature and extent of internal audit functions’
involvement in environmental, social and governance
assurance and consulting in Australia
• Internal audit functions are very involved in providing
assurance on governance issues and reasonably involved
in social issues, but internal audit functions perform a very limited role in providing assurance on environmental
issues;
• Internal audit functions are limited involved in consulting
activities with regard to assurance;
• Environmental issues are widely expected to increase in
importance to internal audit functions;
• Internal audit functions’ skills and competencies with
regard to environmental issues are in greatest need of
further development;
• There is a divergence in usage of standards by internal
audit functions in performing relevant engagement.
Chapter 2: Literature Review 47
[14] AAR Vafaei, Ahmed, and
Mather (2015)
The relationship between gender diversity at board level
and firms’ financial performance
• Board diversity is positively associated with financial
performance.
[15] AAAJ Vesty, Telgenkamp,
and Roscoe (2015)
How is a carbon number (a dollar value derived from
physical units) elevated to become a pivotal actor in
organizational practice?
• The authors highlighted the importance of carbon number
in the newly emergent and evolving carbon market.
[16] MAJ Bepari and Mollik
(2016)
The degree to which assurance statements in sustainability
disclosure enhance and uphold organisational transparency
and accountability to stakeholders
• The assurance statements in sample lack stakeholders’
engagement assurance process, are limited in the scope,
and exhibit reluctance of the assuror to address to the
stakeholder groups;
• As the assurance statements in sample focus on internal
systems, process, data generation and data capture,
assurance practice is serving more as an internal control
tool than as a social accounting/auditing instrument.
[17] ARJ Kumarasiri and Jubb
(2016)
Use of management accounting techniques by Australian
large listed firms in constraining their carbon emissions
• Relevant regulations drive top management and boards to
use management accounting techniques to set targets,
measure performance and incentivise emission mitigation.
[18] AAAJ McPhail and Adams
(2016)
How respect for human rights is emerging and being
operationalized in the discourse of 30 Fortune 500 firms in the mining, pharmaceutical and chemical industries at two
key points in the recent evolution of the United Nations’
business and human rights agenda?
• Corporate constructions of human rights are broad: from
labour rights, through social and political rights, to the right to health and a clean environment;
• The corporate discourse is one of promoting, realizing and
upholding rights that construct the corporation as an
autonomous source of power beyond the state.
[19] AAAJ Moore and McPhail
(2016)
How and to what extent was the development of carbon
accounting frameworks at the policy, industry and
organizational levels enabled by external structures as
conditions of action?
• Soft power and trust are two drivers of the development of
carbon accounting frameworks.
[20] ARJ Ong, Trireksani, and Djajadikerta (2016)
The quality of sustainability disclosures in the current leading environmentally sensitive industry in Australia,
the resources industry
• Australian resources firms report more soft disclosure items than hard disclosure items;
48 Chapter 2: Literature Review
• Australian resources firms report the most sustainability
information in the economic aspect.
[21] ARJ Sands, Rae, and
Gadenne (2016)
The feasibility of integrating the social, environmental and
innovation processes within the four-perspective
sustainability balanced scorecard model
• It is feasible to integrate environmental, social and
innovation-orientated value-creating process into the
internal process of the four-perspective sustainability
balanced scorecard model.
[22] AAAJ Tello, Hazelton, and
Cummings (2016)
The perceptions of potential users about water accounting
reports prepared under Australian general-purpose water
accounting.
• Users perceive the introduction of Australian general-
purpose water accounting as useful and believe that the
benefits will outweigh the costs;
• Government agencies were likely to be the main users of Australian general-purpose water accounting;
• Users were also concerned about the degree of judgement
required to determine the identity and boundaries of a
“water report entity”;
• There was little consensus that Australian general-purpose
water accounting collectively discharged the
accountability of water managers.
[23] MAJ Yunus, Elijido-Ten,
and Abhayawansa
(2016)
Determinants of carbon management strategy adoption
among Australia’s top 200 listed firms • For firms that have carbon management systems, they are
more likely to have an environmental management
system, an environmental committee, larger board and greater board independence.
[24] AAAJ Adams (2017) What is the perceived relationship between the
management and governance of environmental, social and
governance risk, strategy development and value creation?
What role does corporate reporting (including the
processes to develop corporate reports) and cognitive
framing play in mitigating these relationships?
• There is an increased awareness of the impact of
environmental, social and governance issues together with
a broader view of value creation despite investor
disinterest;
• Contemporary reporting processes, and in particular those
set out in the King III Code and the International
Integrated Reporting Framework, affect cognitive frames
that enhance board oversight and assist organizations in
managing complexity.
Chapter 2: Literature Review 49
[25] AAAJ Adler, Mansi, Pandey,
and Stringer (2017)
Biodiversity reporting practices and trends of the top 50
Australian mining firms before and after the United
Nations (UN) declared the period 2011 – 2020 as the
“Decade on Biodiversity”
• A significant increase in the amount of biodiversity
disclosure is observed between 2010 preceding the UN’s
declaration and 2012 and 2013 following the declaration;
• The extent of biodiversity disclosure is quite variable,
with some firms showing substantial increases in their
biodiversity disclosure and others showing modest or no
increase;
• The larger firms in the sample showed a statistically
significant increase in their biodiversity disclosures in
2013 compared with 2010, while the increase in
biodiversity disclosures by smaller firms was not significant;
• The biodiversity information disclosed would not enable
external parties to assess corporate biodiversity
performance.
[26] AF Al‐Hadi, Chatterjee,
Yaftian, Taylor, and
Monzur Hasan (2017)
The relationship between corporate social responsibility
performance and financial distress, and the moderating
impact of firm life cycle stages on this relationship
• There is a negative relationship between corporate social
responsibility performance and financial distress;
• This negative relationship is more pronounced for firms in
mature life cycle stages.
[27] AAR Appuhami and Tashakor (2017)
The influence of audit committee characteristics on voluntary corporate social responsibility disclosure in the
corporate annual reports of Australian listed firms
• Committee size, frequency of committee meetings, committee independence and gender diversity are
positively related to the level of corporate social
responsibility disclosure;
• Independent committee chairperson and members’
financial expertise are not related to the level of corporate
social responsibility disclosure.
[28] AAAJ Blanc, Islam, Patten,
and Branco (2017)
Whether do differences in media exposure regarding
corporate corruption affect firms’ anti-corruption
disclosure?
• Media exposure is positively related to firms’ anti-
corruption disclosure;
• Disclosure is more (less) extensive where home country
press freedom is less (more) restricted;
50 Chapter 2: Literature Review
Whether does the level of press freedom in firms’ home
countries affect relationship between disclosure and the
impact of media exposure?
• Press freedom levels explain more difference in anti-
corruption disclosure than other country-level factors that
potentially affect firms’ anti-corruption disclosure.
[29] AJM Bremer and
Linnenluecke (2017)
A model with regard to organizational adaptation to
climate change • Both environmental attitudes and climate change
knowledge have a significantly positive effect on the
perceived importance of climate change adaptation;
• The aforementioned two relationships are mediated by
risk perception.
[30] AF Hollindale, Kent, Routledge, and
Chapple (2017)
Whether are women on boards associated with disclosure and quality of corporate greenhouse gas emissions related
reporting?
• For firms that have multiple female directors, their greenhouse gas emissions related disclosures are in higher
quality.
[31] PAR Hossain (2017) Biodiversity reporting of the Murray-Darling Basin
Authority, an Australian public sector enterprise, and the
possibility of incorporating biodiversity accounting in
mainstream financial reporting systems of the Authority
• Biodiversity disclosures of the Authority allow a partial
construction of an inventory of natural assets;
• The adequacy of biodiversity data from other sources
make it easier to construct the inventory of natural assets.
[32] AF Hutchinson, Mack, and
Verhoeven (2017)
The gender pay gap in ASX-listed firms
• In terms of performance-based remuneration, females
receive on average 16.47 percent less in cash bonus and
18.21 percent less in long-term incentives than males. [33] AAR Islam, Haque, and
Roberts (2017)
Whether do Australian mineral firms operating in high
human rights risk countries provide more human rights
disclosures than firms operating in low risk countries?
• Human rights disclosures by firms operating high human
rights risk countries are significantly higher than firms
operating in low risk countries.
[34] AF Kent and Zunker
(2017)
What drives Australian firms to voluntarily report
employee-related information? • Employee share ownership, employee concentration, the
quality of corporate governance, employee recognition in
corporate mission statements, adverse publicity about
employees and economic performance measured by profit
per employee
[35] AAR Lodhia and Stone (2017)
The potential role of Internet communication technologies, including social media, in the integrated reporting process
• Use of Internet technologies can enhance external communications with integrated reporting stakeholders.
Chapter 2: Literature Review 51
[36] AF Luo (2017) The relationship between the level of voluntary carbon
disclosure and carbon emission performance, and effect of
institutional context on this relationship
• There is a negative relationship between voluntary carbon
disclosure and carbon emission performance;
• Stringent carbon institutions positively affect this
relationship.
[37] AAR Martínez-Ferrero,
Villarón-Peramato,
and García-Sánchez
(2017)
Investors’ ability to identify if managers use corporate
social responsibility as an entrenchment practice to
conceal the risk of dismissal associated with managerial
discretion and, if this detection is determined by the level
of investor protection orientation
• Investors and markets do not identify managerial
entrenchment in the promotion of sustainable practices,
except when such entrenchment is developed by firms
domiciled in countries with strong investor protection.
[38] AAAJ Powell and Tilt (2017) The inside details of a firm that attempted to keep a balance between financial sustainability and
environmental sustainability
• This firm did not effectively transfer the power held by managers who align with environmental sustainability to
managers who align with financial sustainability, possibly
leading to its ultimate demise;
• A new business model is needed to ensure an effective
transition.
[39] AAAJ Sundin and Brown
(2017)
The integration of environmental issues into management
control systems • The integration of environmental issues affects firms’
focus;
• When the interests of agents are aligned to environmental
outcomes, environmental outcomes at least receive
somewhat systematic consideration in decision making.
[40] AF Abhayawansa, Elijido‐
Ten, and Dumay
(2018)
Whether does integrated reporting achieve its intended
purpose by focusing on its usefulness as perceived by sell-
side analysts?
• Integrated reporting is disconnected with analysts’
practice of firm assessment;
• The improvements with regard to integrated reporting are
not relevant to analysts.
[41] ARJ Ahmed, Higgs, Ng,
and Delaney (2018)
Determinants of women representation on Australian
corporate boards under the ASX’s “if not, why not”
corporate governance framework
• Firm size, women as board chair, corporate governance
index, Global Reporting Initiative signatory, debt ratio,
average board age, use of Big 4 auditors, CEO tenure and
shareholder concentration
[42] AJM Beck, Frost, and Jones
(2018)
The relationship between corporate social responsibility
engagement (measured by diversity in voluntary disclosure practices) and financial performance across three reporting
• There is a positive relationship between corporate social
responsibility engagement and financial performance.
52 Chapter 2: Literature Review
jurisdictions, namely Australia, Hong Kong and the United
Kingdom
[43] AAR Blanc, Branco, and
Patten (2018)
The relationship between countries’ cultural characteristics
and firms’ anti-corruption disclosures
• For firms are domiciled in more ‘secretive’ countries, they
have significantly lower levels of anti-corruption
disclosure.
[44] PAR Biswas, Mansi, and
Pandey (2018)
The relationship between board gender composition, board
independence and the existence of a board sustainability
committee and social and environmental performance
• A positive relationship between the aforementioned three
corporate governance characteristics and social and
environmental performance.
[45] AAR Dumay and Hossain
(2018)
The extent to which the top 100 ASX listed firms
disclosed economic, environmental and social sustainability risk factors during the 2014/15 financial year
• While all firms complied with the Recommendation 7.4,
questions of substance over form were raised, as some firms had risks that were not disclosed according to this
Recommendation.
[46] AAAJ Egan and Tweedie
(2018)
How can accountants contribute to organisational
sustainability initiatives? • Initially, management successfully engaged accountants;
• As related initiatives expanded, adaptable accountants
were difficult to find;
• The capacity of accountants to engage in sustainability
initiatives was also affected by management’s perception
of accountants’ role, the economic and symbolic capitals
management provided and the “stakes” of the
organisational field.
[47] ARJ Elsayih, Tang, and Lan
(2018)
The relationship between corporate governance
mechanisms and the extensiveness of carbon disclosure • Board independence, number of females on the board and
managerial ownership are positively related to the
extensiveness of carbon emissions disclosure.
[48] AAR García‐Sánchez and
Noguera‐Gámez
(2018)
Determinants of use of integrated reporting • Firm incentives are more influential than country factors;
• For firms that encounter higher levels of asymmetry
information problems, firm incentives dominate country
factors;
• For firms that encounter lower levels of asymmetry
information problems, country factors are more
influential.
Chapter 2: Literature Review 53
[49] AAAJ Heggen, Sridharan,
and Subramaniam
(2018)
Why do firms governed by the same environmental
management standards within an industry exhibit
contrasting responses, with some adhering to the letter and
others achieving the spirit behind the standards?
• The extent to which founder directors and senior
management integrate environmental responsibility with
the underlying business motives;
• The use of organisational beliefs and values systems to
institutionalise the integrated strategic rationality
throughout the firm;
• The participation and expertise of actors across the
organisational hierarchy.
[50] JCAE Krishnamurti, Shams,
and Velayutham
(2018)
Whether and to what extent does corporate social
responsibility affect international firms’ corruption risk? • Corporate social responsibility mitigates corruption risk;
• The relationship between corporate social responsibility and corruption risk is affected by country-level variables,
including institutional quality, protection of minority
shareholders’ rights, stock market development and
freedom of the press;
• In emerging countries, corporate social responsibility
reduces corruption risk only when the country-level
institutional quality is high, and citizens enjoy press
freedom.
[51] AJM Nguyen (2018) The effect of carbon risk on firm performance in context
of the Australia ratification of Kyoto Protocol in
December 2007
• Firms in highest-emitting industries experienced a relative
reduction in their financial performance subsequent to the
ratification;
• The effect of carbon risk is more pronounced among
financially constrained firms.
[52] AJM Nguyen, Agbola, and
Choi (2018)
Relationship between corporate social responsibility and
information asymmetry • There is a negative relationship between corporate social
responsibility performance and information asymmetry;
• Firm size, firms’ market power and equity risk affect this
relationship.
[53] AAAJ Phan, Baird, and Su
(2018)
The extent of use of environmental activity management,
the relationship between environmental activity
management and environmental performance, and the role
of decision quality as a mediator in this relationship
• A relatively high extent of environmental activity
management, but a low extent of use of environmental
activity cost analysis and environmental activity-based
costing;
54 Chapter 2: Literature Review
• For firms that use environmental activity management to a
greater extent, they generate better environmental
performance;
• Decision quality affects the relationship between
environmental activity management and environmental
performance.
[54] AJM Salignac, Galea, and
Powell (2018)
The drivers and processes of change with regard to gender
equality in the workplace. • Although gender equality is an important topic for both
firms in this study, there are discrepancies between
perceptions and reality, and people’s level of readiness is
also different.
Table 2-5 Research Themes and Methods of 54 Studies from 2014 to 2018 in Nine Designated Accounting Journals Number of
Studies
Studies (in Code)
Panel A – Research Themes
Biodiversity 2 [25], [31]
Carbon/ Climate Change 13 [5], [6], [7], [9], [15], [17], [19], [23], [29], [30], [36], [47], [51] Charity 1 [1]
Employees 1 [34]
Environmental 4 [38], [39], [49], [53]
Firm Corruption 3 [28], [43], [50]
Gender 5 [14], [30], [32], [41], [54]
Health and Safety 1 [12]
Human Rights 2 [18], [33]
Integrated Reporting 3 [35], [40], [48]
Sustainability/ Social Responsibility (in
General)
17 [4], [8], [10], [11], [13], [16], [20], [21], [24], [26], [27], [37], [42], [44], [45], [46], [52]
Water 3 [2], [3], [22]
Panel B – Research Methods
Case/ Field Study/ Interviews 14 [2], [3], [13], [15], [17], [22], [24], [25], [38], [39], [40], [46], [49], [54]
Content Analysis/ Historical Analysis 13 [10], [16], [18], [19], [20], [25], [30], [31], [33], [38], [39], [45], [49]
Chapter 2: Literature Review 55
Structural Equation Modelling/ Regression/
Event Study
29 [1], [4], [5], [6], [7], [8], [9], [11], [14], [21], [23], [26], [27], [28], [29], [30], [32], [34], [36], [37], [41],
[42], [43], [44], [47], [48], [50], [52], [53]
Commentary/ Normative/ Policy 2 [12], [35]
56 Chapter 2: Literature Review
2.5.1 Studies about Sustainability Disclosure
There are 23 studies ([1], [3], [4], [6], [10], [12], [18], [20], [24], [25], [27], [28],
[30], [31], [33], [34], [35], [36], [40], [43], [45], [47], [48]) that explore sustainability
disclosure. First, McPhail and Adams (2016) (human-rights disclosure), Adler, et al.
(2017) (biodiversity disclosure), Hossain (2017) (biodiversity disclosure) and Dumay
and Hossain (2018) (sustainability risk disclosure) shed light on how Australian firms
disclosed their sustainability practices. Ong, et al. (2016) analysed how firms affiliated
with resources industry communicated sustainability practices.
Secondly, determinants of (a specific type of) sustainability disclosure are tested
by a number of studies. Canny (2014) (charity disclosure), Appuhami and Tashakor
(2017) (sustainability disclosure), Hollindale, et al. (2017) (carbon disclosure), Kent
and Zunker (2017) (employee-related disclosure) and Elsayih, et al. (2018) (carbon
disclosure) examined determinants at firm level. Blanc, et al. (2017) (anti-corruption
disclosure), Islam, et al. (2017) (human-rights disclosure), Blanc, et al. (2018) (anti-
corruption disclosure) and García‐Sánchez and Noguera‐Gámez (2018) (integrated
reporting) examined determinants at national level. Loh, et al. (2015) focused on how
industrial environment affects sustainability disclosure.
Thirdly, non-economic consequences of sustainability disclosure are considered
by O'Neill, et al. (2015) and Adams (2017). O'Neill, et al. (2015) examined how work-
related injury data can be interpreted to depict quite different pictures about reality. By
interviewing business leaders in South Africa and Australia, Adams (2017) found that
sustainability disclosure contributes to an integration of sustainability with corporate
governance.
Fourthly, usefulness of integrated reporting (a type of sustainability disclosure)
to financial analysts has been explored by Abhayawansa, et al. (2018). Hazelton (2014)
investigated usefulness of another new type of sustainability disclosure, namely water
footprint labelling.
Fifthly, relationship between (a specific type of) sustainability disclosure and (a
specific area of) sustainability performance has been tested by Herbohn, et al. (2014)
(environmental disclosure of mining and energy firms), Luo and Tang (2014b) (carbon
disclosure of firms in three countries) and Luo (2017) (carbon disclosure of firms in
multiple countries). It is noteworthy that while Luo and Tang (2014b) and Luo (2017)
focus on relationship between carbon disclosure and carbon performance, they reach
Chapter 2: Literature Review 57
opposite conclusions. Last, Lodhia and Stone (2017) normatively highlighted potential
contribution of Internet to integrated reporting.
2.5.2 Studies about Sustainability Performance
There are 13 studies ([2], [7], [17], [29], [32], [38], [39], [41], [44], [46], [49],
[53] and [54]) that focus on sustainability performance. First, Hutchinson, et al. (2017),
examining 41, 655 executive-year observations from 2002 to 2013, found existence of
gender inequity in directors’ remuneration in Australia. Secondly, a number of studies
focus on how corporate governance (dis)encourages (a specific area of) sustainability
performance. Tang and Luo (2014) examined effect of carbon management system on
firms’ carbon performance. Powell and Tilt (2017) highlighted need for new business
model to solve tensions due to power transfer among managers in terms of keeping a
balance between economic sustainability and environmental sustainability. Biswas, et
al. (2018) examined effect of three corporate governance characteristics, namely board
gender diversity, board independence and existence of sustainability committees, on
firms’ sustainability performance. Sundin and Brown (2017) and Phan, et al. (2018)
discussed importance of internal management systems to environmental performance.
Heggen, et al. (2018) revealed organizational culture and integration of sustainability
with corporate governance would impact firms’ environmental performance. Thirdly,
Ahmed, et al. (2018) investigated a number of firm characteristics that are expected to
relate to gender diversity on board. Fourthly, how individuals within firms would (dis)
encourage (a specific area of) sustainability performance has been examined by three
studies. By surveying 101 energy firms in Australia, Bremer and Linnenluecke (2017)
reported that managers’ environmental attitudes, climate change knowledge and risk
perception affect how they perceive importance of climate change adaptation. Egan
and Tweedie (2018) examined how accountants were engaged in firms’ sustainability
initiatives. Salignac, et al. (2018) focused on how institutional entrepreneurs promote
gender diversity within construction industry in Australia. Last, Egan (2014) explored
how institutions at field level motivate firms’ water efficiency, and Kumarasiri and
Jubb (2016) examined how regulation inspires firms to use management accounting to
improve their carbon performance.
58 Chapter 2: Literature Review
2.5.3 Studies about Economic Consequence of Corporate Sustainability
There are 10 of 54 studies ([5], [9], [11], [14], [26], [37], [42], [50], [51] and
[52]) that examine economic consequence of corporate sustainability. First, how
carbon-related public policy and climate change affect firm value has been studied by
Luo and Tang (2014a) (proposed carbon tax in 2011), Nguyen (2018) (ratification of
Kyoto Protocol in 2007) and Linnenluecke, et al. (2015) (impairment loss caused by
climate change). Secondly, Martínez-Ferrero, et al. (2015) tested relation between
firms’ sustainability performance and earnings management at international level, and
Martínez-Ferrero, et al. (2017) analysed whether investors can detect linkage between
sustainability performance and managerial entrenchment. Nguyen et al. (2018) shed
light on relation between sustainability performance and information asymmetry.
Thirdly, relationship between (a specific area of) sustainability performance and
financial performance has been examined by Vafaei, et al. (2015) (how gender
diversity of board of directors is related to financial performance) and Krishnamurti,
et al. (2018) (how firms’ sustainability performance is related to corruption risk).
Fourthly, relationship between sustainability disclosure and financial performance has
been analysed by Al‐Hadi, et al. (2017) and Beck, et al. (2018).
2.5.4 Studies about Assurance Services
Three studies ([8], [13] and [16]) examine assurance services. First, Fernandez‐
Feijoo, et al. (2015) investigated determinants at national and firm levels with regard
to use of assurance services. Secondly, Soh and Martinov-Bennie (2015) explored how
internal auditors participate in assurance services. Thirdly, Bepari and Mollik (2016)
discussed accountability consequence of external assurance services by analysing the
assurance statements.
2.5.5 Studies about Corporate Governance with regard to Corporate
Sustainability
There are two studies ([21] and [23]) that focus on corporate governance devices
or structures with regard to corporate sustainability. First, Sands, et al. (2016) explored
how we can better use sustainability scorecard. Secondly, Yunus, et al. (2016) analysed
determinants at firm level in use of carbon management systems.
Chapter 2: Literature Review 59
2.5.6 Other Studies about Corporate Sustainability
In addition to the aforementioned five research topics (disclosure, performance,
economic consequence, assurance services and corporate governance), other topics are
also considered. Focusing on relevant public policy, Moore and McPhail (2016) shed
light on development of carbon accounting frameworks, and Tello, et al. (2016) elicit
users’ views about general-purpose waster accounting. In context of a large Australian
water utility, Vesty, Telgenkamp, and Roscoe (2015) discussed effect of quantifying
carbon emissions.
2.5.7 How this Thesis is Positioned in the Australian Literature
My first question (RQ1: Whether and how is an Australian firm’s sustainability
performance associated with its sustainability disclosure?) aligns with Herbohn, et al.
(2014), Luo and Tang (2014b) and Luo (2017) that focus on the relationship between
disclosure and performance. Chapter 3 (in which I examine RQ1) differentiates from
these studies by focusing on various textual characteristics of sustainability disclosure
together and using more recent and comprehensive data. Thus, Chapter 3 can provide
much richer and more generalizable conclusions about this frequently examined topic,
namely how disclosure relates to performance.
The second research question (RQ2: How is experience of disclosure related to
sustainability performance?) develops results of Adams (2017) by empirically testing
how firms’ experience of disclosure is related to their sustainability performance. My
approach differentiates from Adams (2017) who interviewed directors in Australia and
South Africa by analysing a set of panel data collected and synthesized. Collectively,
my work in addressing RQ2 and Adams (2017) explores the relationship between
disclosure and performance from a novel view: instead of examining how
sustainability disclosure is related to or affected by sustainability performance, I
explore or consider the other way around, namely how engagement in sustainability
disclosure affects or relates to sustainability performance.
The third research question (RQ3: How is the sustainability committee related
to sustainability performance?) relates to Tang and Luo (2014), Powell and Tilt (2017),
Biswas, et al. (2018), Sundin and Brown (2017), Phan, et al. (2018), and Heggen, et
al. (2018) by examining the effect of sustainability committees on firms’ sustainability
performance in detail. My work of addressing RQ3 differentiates from the
60 Chapter 2: Literature Review
aforementioned studies in two ways. First, I investigate sustainability committee as a
governance mechanism devoted to corporate sustainability, which is not
systematically studied yet has implications for practice. Second, I use a more robust
research design that is built on a longer sample period, richer committee
characteristics, inclusion of firms in different industries, and the use of different
performance measurements to render comprehensive evidence in this regard.
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 61
Chapter 3: Textual Characteristics of
Sustainability Disclosure and their
Relationship to Sustainability Performance
3.1 INTRODUCTION
As Chapter 1 illustrates, corporate sustainability includes economic prosperity,
social equity and environmental integrity (Bansal, 2005). Prior literature emphasises
environmental and social impact due to firms’ operational activities (Dahlsrud, 2008).
Ostensibly, sustainability disclosure is an important part of transparency in corporate
sustainability, which is a key concern of many stakeholders (Gray, Owen, & Adams,
1996). There is currently a momentum of mandatory sustainability disclosure24 at a
global level. For instance, sustainability disclosure has been mandated according to
firm size in Argentina and the European Union.25 Exchanges in the Asia-Pacific region
are taking action on mandatory sustainability disclosure.26 The Australian Securities
Exchange is a partner of the Sustainable Stock Exchanges Initiatives27, an initiative
backed by the United Nation to improve transparency of corporate sustainability, and
it also acknowledges ‘long term sustainable value’ and ‘acting lawfully, ethically and
responsibly’ (ASX, 2019, p. 16). In addition to the Australian Securities Exchange,
legislators and regulators have begun to address firms’ sustainability and disclosure,
as discussed in Chapter 1. For instance, a firms’ contributions to climate change have
been discussed by the Senate Economics References Committee28 and the Australian
Securities and Investments Commission.29
24 According to United Nations Environment Programme and KPMG (2006) and United Nations
Environment Programme et al. (2010, 2013, 2016), there is indeed a trend of mandatory disclosure of
corporate sustainability. 25 See the Ley Nº 2594 de Balance de Responsabilidad Social y Ambiental (BRSA) and Directive
2014/95/EU. 26 The Hong Kong Exchange, Singapore Exchange and Taiwan Stock Exchange also mandate sustainability disclosure to their listed firms, and more information can be found at
http://www.sseinitiative.org/ (access date is 8 May 2019). 27 More information about the Sustainable Stock Exchanges Initiatives and who are partner exchanges
can be found at http://www.sseinitiative.org/ (access date is 8 May 2019). 28 This committee published a report, Carbon Risk: A Burning Issue, in 2017. 29 As the market regulator in Australia, the Australian Securities and Investments Commission
released a report, Climate Risk Disclosure by Australia’s Listed Companies, in 2018.
62 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
From a broader perspective, as firms and stakeholders incur costs in preparing,
disseminating and using sustainability disclosure, transparency of firms’ sustainability
performance can be undermined by corporate symbolic action. Bowen (2014) explains
that symbolic action has social cost, as resources invested on symbolic action could
alternatively be devoted to substantial action. Therefore, research on sustainability
disclosure is also meaningful to society in general.
In practice, Australian firms are increasingly engaged in sustainability disclosure
(KPMG, 2015, 2017), and stakeholders actively utilise such disclosure. Pérez-Gladish
et al. (2012) and Eccles et al. (2017) found that institutional investors are increasingly
engaged in socially responsible investment, and they view low quality of sustainability
disclosure as a significant obstacle. KPMG and SustainAbility (2008), surveying non-
financial stakeholders, find that they use sustainability disclosure in a number of
scenarios. It is a reasonable expectation that sustainability disclosure will find more
users in the future, as socially-responsible-investment assets in Australia and New
Zealand rose by 247% from 2014 to 2016 to reach $516 billion (Foo, 2017).
Practitioner surveys and prior literature generally identify the sustainability
themes disclosed, how much information is reported, and where such information is
disclosed. The practitioner surveys on disclosure practices of Australian firms find that
more firms are engaged in sustainability disclosure, and more disclosure is being
released (Australian Council of Superannuation Investors, 2009, 2010, 2011, 2012,
2013, 2014, 2015, 2016, 2017, 2018; KPMG, 2013, 2015, 2017). Using the Global
Reporting Initiative, Frost et al. (2005) and Beck et al. (2018) evaluate sustainability
disclosure and find that Australian firms prefer standalone reports and their websites
as methods of communicating issues relating to sustainability and are able to present
them in a way that matches their performance.
This chapter extends on Cho et al. (2010), Arena et al. (2015), Beattie (2014),
Tregidga, Milne, and Lehman (2012) and Wang et al. (2018) by investigating textual
characteristics of sustainability disclosure (which cover linguistic characteristics) and
is informed by prior literature about textual characteristics in financial disclosure (see
e.g. Henry & Leone, 2016; Huang, Teoh, & Zhang, 2014; Li, 2010b; Loughran &
McDonald, 2016). As documented by prior literature about textual characteristics of
financial information (Ertugrul et al., 2017; Henry & Leone, 2016; Kearney & Liu,
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 63
2014), it is argued linguistic characteristics of sustainability disclosure are meaningful,
as they affect how stakeholders understand sustainability disclosure.
As Wood (1991a, 1991b, 2010), Clarkson et al. (2008), Clarkson et al. (2011),
Tregidga et al. (2014), Rao and Tilt (2016), Global Reporting Initiative (2014) and
Guthrie (2016) indicate, whether and how textual characteristics of disclosure relate to
performance are in debate. Prior literature reviewed in Chapter 2 suggests different
theories or theoretical frameworks inform different views in terms of their relationship.
For example, signalling theory proposes good performers use textual characteristics of
disclosure to signal their good performance (Connelly, Certo, Ireland, & Reutzel,
2011), yet institutional theory (decoupling) conjectures that bad performers use their
method of disclosure to cover up their unsatisfactory or bad performance (Delmas &
Burbano, 2011; Laufer, 2003; Ramus & Montiel, 2005). This chapter develops the
following research question:
RQ1: Whether and how is an Australian firm’s sustainability performance
associated with its sustainability disclosure?
Through analysing 2,076 firm-year observations (2002-2016), Chapter 3 models
seven textual characteristics (amount of disclosure, amount of quantitative information
in disclosure, amount of information in relation to environmental impact, tone of
optimism in disclosure, tone of certainty in disclosure, tone of clarity in disclosure,
and readability of disclosure) as variables of interest; where the dependent variable is
sustainability performance. I identified a positive relationship between sustainability
performance and six of the seven textual characteristics – good performers disclose
more information, more quantitative data, more environmental-impact information
and present their disclosure in a certain, clear and optimistic manner. These findings
lend support to the arguments of signalling theory.
In addition, this chapter identifies that firms with better performance present
their sustainability disclosure in a more readable way, the seventh characteristic. This
finding supports the incomplete revelation hypothesis proposed by Bloomfield (2002,
2008) wherein firms with better performance communicate their performance in ways
that stakeholders can easily comprehend. Chapter 3 argues that this finding aligns to
some extent with signalling theory – good performers prepare their disclosure in a way
that signals their superior performance.
64 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
These findings are in line with Herbohn et al. (2014), who found that Australian
firms with better environmental performance release higher quality environmental
disclosure. The findings of this chapter are robust to different sensitivity checks that
have been performed in addition to the main analysis. From a theoretical view, Chapter
3 reveals the explanatory power of signalling theory and the incomplete revelation
hypothesis.
Ostensibly, this chapter enriches the current literature through focusing on the
relationship between disclosure and performance by investigating various linguistic
characteristics of sustainability disclosure (Beattie, 2014; Beattie & Davison, 2015)
and extending the research scope from content to include other textual characteristics.
For example, seminal studies in extant literature, Guthrie and Parker (1989) and
Deegan et al. (2002) analyse thematic content of disclosure via the lens of legitimacy.
Responding to Beattie et al. (2004) and Beattie (2014), this thesis extends the scope of
linguistic analysis from financial disclosure to sustainability disclosure, suggesting the
usefulness of linguistic analysis in different areas. Cho et al. (2010), Arena et al. (2015)
and Wang et al. (2018) examined the tone of optimism and readability, respectively,
in disclosure of the US firms. Chapter 3 extends the aforementioned studies in four
ways: (1) as a standalone report has more detailed sustainability information, I sampled
disclosure from two mediums (standalone report and annual report); (2) this chapter
covers both social and environmental disclosure, rather only environmental disclosure;
(3) this chapter samples firms from a wide range of industries over a time period of 15
years, while prior studies usually sample fewer industries and are generally conducted
over shorter time periods; (4) Chapter 3 takes into account seven textual characteristics
rather one characteristic at a time. Chapter 3 presents a more comprehensive picture
about sustainability disclosure.
The research findings are likely to be of interest to external assurance providers
of sustainability disclosure. In addition to content, the textual characteristics examined
in Chapter 3 are worthy of attention when performing assurance services on disclosure.
As sustainability disclosure has been a channel of communicating sustainability issues
(Higgins, Milne, & Gramberg, 2015), the findings advise future regulatory framework
to pay more attention on readability of sustainability disclosure.
The rest of this chapter is structured as follows. Prior literature is discussed in
Section 3.2. Hypotheses are developed in Section 3.3. Research design is illustrated in
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 65
Section 3.4. Findings are presented in Section 3.5. This chapter concludes in Section
3.6.
3.2 RELEVANT KEY LITERATURE
There are few Australian studies that link disclosure directly with performance.
Relevant existing studies do not reach a consensus about the relationship between
disclosure and performance. Examining how firms that are penalized for their poor
environmental performance (1990 - 1993) report environmental performance in annual
reports, Deegan and Rankin (1996) find firms disclose more favourable environmental
information after they are penalized for their poor performance, a negative relationship
between disclosure content and underlying performance. Following the sample period
of 1994 – 1998, Mitchell, Percy, and McKinlay (2006) reach similar findings. Testing
how Australian firms report their environmental performance, Clarkson et al. (2011)
sampled 51 firms between 2002 and 2006. Referring to content analysis developed by
Clarkson et al. (2008), their study reveals that firms with a higher pollution propensity
disclose not only more information but also more information that is perceived to be
objective and verifiable. Thus, the above studies indicate that worse performers tend
to put more effort in disclosure.
By contrast, Herbohn et al. (2014), sampled 339 firms from the materials as well
as energy industries and found better performers disclose environmental information
with higher quality. There is a caveat in that their study sample only covers 2006. My
research differentiates from Herbohn et al. (2014) in four ways. First, instead of using
corporate disclosure to estimate sustainability performance, I use panel data provided
by ESG rating agency to measure sustainability performance. Second, instead of using
firms from the energy and materials industries as the sample, I construct my sample
based on firms from various industries. Third, my research focuses on textual
characteristics of sustainability disclosure, rather than disclosure content. Fourth,
instead of analysing cross-sectional data, I examine panel data. Conflicting results
about the relationship between disclosure and performance may be attributed to
various reasons, including different research analysis, sample selection and methods
of coding environmental disclosure. Examining the relation between disclosure of
greenhouse gas emissions (it is measured in the number of items disclosed) and
greenhouse gas emissions in three countries (i.e. the US, the UK and Australia), Luo
66 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
and Tang (2014) found that firms that emit less greenhouse gas or adopt better
mitigation techniques disclose more items relevant to greenhouse gas emissions.
In addition to prior studies examining environmental performance, there are
other studies that approach corporate sustainability from a social perspective, for
example taxation. Prior literature, including Sikka (2010), Huseynov and Klamm
(2012) and Hoi, Wu, and Zhang (2013), argues that corporate tax decisions can be
considered as part of a firm’s sustainability, as tax decisions have a discernible social
impact. In this sense, tax avoidance is perceived to have a negative social impact.
Analysing two different samples of Australian firms, Lanis and Richardson (2012a,
2012b) produce opposite findings. Lanis and Richardson (2012a) identify that firms
accused by the Australian Taxation Office of engaging in tax aggressive activities from
2001 to 2006 release more sustainability disclosure (i.e. it is measured in number of
sentences). In the other sample that covers 408 firms in 2008, Lanis and Richardson
(2012b) find that more disclosure (i.e. it is measured in number of items disclosed) is
related to lower level of corporate tax aggressiveness.
Except for content, other textual characteristics of sustainability disclosure are
analysed by very few studies. Cho et al. (2010) studied 190 US firms in 2002 and
found that worse performers communicated in more optimistic and certain terms.
Arena et al. (2015) investigated 96 US firms in the oil and gas sector between 2008
and 2010 and found that the level of optimism in environmental disclosure signals
future environmental performance. These two studies suggest that there are two roles
of tone of optimism in environmental disclosure: covering up poor performance and/or
signaling future performance. Another linguistic characteristic, namely the readability
of sustainability disclosure, has been analysed by Wang et al. (2018) who sampled 331
US firm-year observations from 2009 to 2012. They found a positive relationship
between performance and readability of disclosure. Furthermore, the relationship is
stronger for social disclosure than for environmental disclosure. My research expects
to extend the aforementioned studies in two ways. First, by analysing various textual
characteristics at a time, I can render more compelling and comprehensive evidence in
relation to textual characteristics of sustainability disclosure. The aforementioned US
studies examine one or two textual characteristic(s) at a time, greatly restricting their
ability to present a more complete picture about textual characteristics of sustainability
disclosure. Second, by including environmental and social themes and constructing a
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 67
set of panel data based on firms from a diverse range of industries, this research is able
to draw richer and more generalizable conclusions than the three studies referred. It is
notable that the readability of financial information also has been extensively analysed.
Chapter 3 refers to this silo of literature to include control variables in specification
design.
In summary, prior literature can be enriched by Chapter 3 in two ways. First, this
chapter contributes to the Australian literature by casting light on how disclosure
relates to performance. Extending on prior studies, I include different characteristics
of disclosure at a time. Secondly, this chapter contributes to growing literature
regarding linguistic analysis and sustainability disclosure. I use more recent and
comprehensive data: environmental and social themes are included, and the panel data
nature of my sample, combined with an inclusive analysis of textual characteristics
allows one to draw much richer and more generalizable conclusions. The theoretical
framework and hypotheses are introduced in following section.
3.3 THEORETICAL FRAMEWORK AND HYPOTHESIS
DEVELOPMENT
This chapter outlines the first hypothesis presented in this thesis according to
two theories, namely institutional theory (Meyer, 1992; Meyer & Rowan, 1977; Scott
& Meyer, 1992) and signalling theory (Connelly et al., 2011; Morris, 1987). The first
theory, institutional theory, suggests that for firms within a same organizational field,
their strategies can be “substantially influenced by the broader institutional settings in
which they operate and shaped by the institutional legacies that reflect the culture,
history, and polity of the particular country or region” (Doh & Guay, 2006, p. 49). In
relation to what consists of organizational field, DiMaggio and Powell (1983, p. 148)
suggest that “those organizations that, in the aggregate, constitute a recognized area of
institutional life: key suppliers, resource and product consumers, regulatory agencies,
and other organizations that produce similar services or products”. Another two basic
concepts in institutional theory are institutions and formal structures (also known as
organizational structures). Scott (2001, p. 48) explained “institutions are composed of
culture-cognitive, normative and regulative elements that, together with associated
activities and resources, provide stability and meaning to social life”. There are three
types/silos of institutions, cognitive-cultural, social-normative and coercive-regulative
(Scott, 2001).
68 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Institutions shape formal structures that confer legitimacy30 on firms that put the
formal structures in place. Formal structures are defined as “a blueprint for activities
which includes, first of all, the table of organization: a listing of offices, departments,
positions, and programs. These elements are linked by explicit goals and policies that
make up a rational theory of how, and to what end, activities are to be fitted together”
(Meyer & Rowan, 1977, p. 342). Pressures imposed by three types/silos of institutions
contribute to isomorphism, which is defined as “a constraining process that forces one
unit in a population to resemble other units” in a same organizational field (DiMaggio
& Powell, 1983, p. 149). Restated, institutional pressures force firms to use similar or
even identical formal structures.
There are three isomorphism processes. First, coercive isomorphism is related to
external factors, including regulations (DiMaggio & Powell, 1983). Second, mimetic
isomorphism, involves firms trying to emulate or copy other firms’ practices, mainly
to obtain competitive advantage (DiMaggio & Powell, 1983). Third, there is normative
isomorphism. It relates to the pressures emerging from common values to follow, obey
and adopt particular institutional practices. Thus, isomorphism of institutional theory
is used to explain why firms invest in corporate sustainability. For example, Campbell
(2006, 2007) discusses determinants of sustainability performance from institutional
theory aspect, and proposes regulations (imposed by state and industrial associations),
pressure from powerful institutionalized stakeholder groups (e.g., labour union), and
normative calls of corporate sustainability at society level promote better sustainability
performance. Liang and Renneboog (2017) provide empirical evidence supportive to
the theory by demonstrating that legal origins at country level is a major determinant
of sustainability performance.
A possible (negative) consequence of isomorphism is the separation between the
external public image of a firm and its actual structures and procedures or practices. A
firm’s actual practices (sustainability performance) need not necessarily comply with
its external public image (sustainability disclosure). This argument has been discussed
from different interrelating perspectives, including compromise (Oliver, 1988, 1991,
1997), legitimacy (Deegan, 2002), greenwashing (Delmas & Toffel, 2011), decoupling
30 Corporate legitimacy “is meeting and adhering to the expectations of a social system’s norms,
values, rules, and meanings” (Deephouse & Carter, 2005, pp. 331-332).
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 69
(Boxenbaum & Jonsson, 2008) and impression management (Brennan et al., 2009). In
relation to RQ1, from an institutional theory view, worse performers use sustainability
disclosure as a shield from socio-political pressures due to worse performance. They
are expected to disclose sustainability information in ways that disguise their poor
performance and mislead stakeholders. To be specific, textual characteristics analysed
in this chapter consider how much sustainability information, quantitative information
and information about environmental impact are disclosed, to what extent disclosure
is communicated in optimistic, certain and clear tones, and to what extent disclosure
is readable.
In terms of the first six textual characteristics, as institutional theory instructs,
worse performers report information in a more comprehensive way (i.e. measured in
number of words), more quantitative information (operationalized by the Diction 7),
and more information about environmental impact (measured in number of words);
they would communicate in more ambiguous, optimistic and certain tone to mislead
stakeholders.
The second theory, signalling theory, highlights that information asymmetry can
be mitigated by “the party with more information signalling it to others” (Morris, 1987,
p. 48). In the first step, firms in a market are assumed to have more information about
their sustainability than stakeholders. If stakeholders have no information about firms’
sustainability but do have some general concerns (e.g. some of business activities can
be not sustainable), stakeholders measure firms’ sustainability at a weight average of
their concerns. In the second step, for firms that are in above average quality condition
with regard to sustainability, they incur an opportunity loss if stakeholders knew about
their superior sustainability performance, although firms of below average in terms of
sustainability make an opportunity gain. For firms of above average in sustainability,
they would use sustainability disclosures to signal their superior sustainability. In the
third step, as firms that are better in sustainability signal, stakeholders consider all the
remaining firms to be of poor. The best remaining firms then try to screen themselves
from the others via sustainability disclosure. As Connelly et al. (2011) instruct, this is
an iterative process that continues as long as the gain due to signalling is greater than
the signalling costs.
From the aspect of signalling theory, better performers use their sustainability
disclosure to distinguish themselves so that they may reap economic gains and pre-
70 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
empt potential/future regulations (Delmas & Montes Sancho, 2010). To send credible
signals about their better performance, firms arguably present sustainability disclosure
in ways that are difficult to be mimicked by their peers. Regarding the first six textual
characteristics, as signalling theory instructs, better performers are likely to disclose
information in a comprehensive way (more sustainability disclosure, more quantitative
information and more information about environmental impact); they are perceived to
‘talk’ in a less ambiguous tone, actively utilise a more optimistic tone and exhibit more
certainty in their tone. Some studies, including Al-Tuwaijri et al. (2004) (the US),
Freedman and Jaggi (2004) (the US) and Clarkson et al. (2008) (the US) and Marquis,
Toffel, and Zhou (2016) (an international study), lend support to signalling theory.
Prior studies into Australian firms support institutional theory. As Section 3.2
indicates, studies in Australia, including Deegan and Rankin (1996), Mitchell et al.
(2006) and Clarkson et al. (2011), identify that worse performers put more effort into
their disclosure. Studies in other regions, including Cho et al. (2010) (the US), Marquis
and Qian (2014) (China), and Kim and Lyon (2015) (the US), support institutional
theory as well.
Thus, institutional theory informs that disclosure obfuscates worse performance,
and signalling theory posits a positive relationship between sustainability disclosure
and sustainability performance. As these two arguments are backed up by prior studies,
respectively, Chapter 3 does not make a directional hypothesis, and prior literature in
Australia does not give an adequate empirical foundation for a directional hypothesis.
The first non-directional hypothesis is presented below.
H1 There is no relationship between sustainability performance and six textual
characteristics of sustainability disclosure, a) amount of disclosure (i.e. measured in
number of words), b) amount of quantitative information in disclosure (i.e. measured
by the Diction 7), c) amount of information in relation to environmental impact (i.e.
measured in number of words), d) tone of optimism in disclosure (i.e. measured by the
Diction 7), e) tone of certainty in disclosure (i.e. measured by the Diction 7), and f)
tone of clarity in disclosure (i.e. measured by the Diction 7).
This chapter develops a second hypothesis about readability of disclosure and
finds its theoretical foundation in the incomplete revelation hypothesis developed by
Bloomfield (2002, 2008). This hypothesis indicates that information, which is costlier
to extract from corporate communication, would be less comprehended and therefore
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 71
less absorbed by the audience (e.g. investors and other stakeholders). Information that
is costlier to extract exhibits lower readability (Loughran & McDonald, 2014a, 2014b,
2016). The literature about reliability of financial information, including Li (2008),
Bushee et al. (2017), and Jin, Luca, and Martin (2018), reveals that lower readability
of financial information is partially due to strategic decisions initiated by firms.
Following this silo of growing literature, Chapter 3 utilises incomplete revelation
hypothesis to develop the second hypothesis. Lower readability of sustainability
disclosure makes it more difficult for stakeholders to locate or uncover information
that firms attempt to hide (Bloomfield, 2002). It is thus reasonable to conjecture that
firms with better sustainability performance tend to present sustainability disclosure in
a more readable way (higher readability), ensuring that stakeholders comprehend their
performance in a less costly manner. While motivations behind why firms disclose
sustainability are reviewed by different and even conflicting theories31, a consensus
among them is that firms with superior performance are less likely to withhold their
performance. Better performers tend to present their performance in a more readable
way. Accordingly, the second hypothesis is shown below. The research design is
illustrated in following section.
H2 Readability of sustainability disclosure is positively related to sustainability
performance.
3.4 RESEARCH DESIGN
The sample period utilised in this thesis is between 2002 and 2016, as the
Thomson Reuters Asset4 covers Australian firms from 2002, and the data access ends
at 2016. As Section 3.1 indicates, data about sustainability performance was directly
extracted from the Thomson Reuters Asset4 (Asset4). I manually collected standalone
sustainability reports from the Sustainability Disclosure Database32 and various firms’
websites, and this collection took several months to undertake. If there were no
standalone reports, annual reports were examined to extract disclosure about corporate
sustainability. Control variables’ data were downloaded from Morningstar and
31 For example, socio-political theories consider legitimacy as a motivation behind voluntary
sustainability disclosure (Deegan, 2002), and voluntary disclosure theory is inclined to analyse
voluntary disclosure from the economic perspective (Clarkson et al., 2011). 32 Sustainability Disclosure Database is maintained by the GRI, and its URL is
http://database.globalreporting.org/.
72 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Worldscope. This sample consists of Australian firms that are constituents of the ASX
200.33 In total, I collected 2,639 items of sustainability disclosures for testing the
hypotheses. In terms of the first hypothesis, after synthesizing databases and removing
missing data, there is a final sample of 2,076 firm-year observations. Regarding the
second hypothesis, as the data from I/B/E/S are included as an additional control
variable, after synthesizing databases and removing missing data, the sample decreases
to 2,067 firm-year observations. Following Beck et al. (2018), the Global Industry
Classification Standard (GICS) is used to classify sample firms into ten industries.
Panel A in Table 3-1 presents the industry distribution of the sample, and Panel
B in Table 3-1 shows the year distribution of the sample. Panel C in Table 3-1 reports
how this sample was reduced from 2,639. Samples analysed in this chapter are quite
comparable with the samples examined by Nguyen, Agbola, and Choi (2018) who also
used the Thomson Reuters Asset4 to analyse corporate sustainability in Australia. It is
reasonable to suggest that the two samples analysed in this chapter are representative
in terms of industry distribution, compared with the complete ASX200.
33 ASX 200 represents about 82% of the market capitalization on the ASX. More details about ASX
200 can be found at https://au.spindices.com/indices/equity/sp-asx-200, and access date is 13 May
2019.
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 73
Table 3-1 Sample Selection Panel A presents the sample distribution by industry, and Panel B presents the sample distribution by year. Panel C presents the synthesizing process of multiple databases.
Panel A Distribution of the First Sample Firms by Industry
Industrial Affiliation N Percent
Materials 501 24.13
Industrials 411 19.80
Financials 299 14.40
Energy 282 13.58
Consumer Discretionary 204 9.83
Consumer Staples 127 6.12
Health Care 122 5.88
Utilities 54 2.60
Information Technology 41 1.97
Telecommunication Services 35 1.69
Total 2076 100
Panel B Distribution of the First Sample Firms by Year
Year N Percent 2002 2 0.10
2003 2 0.10
2004 47 2.26
2005 55 2.65
2006 52 2.50
2007 57 2.75
2008 67 3.23
2009 152 7.32
2010 230 11.08
2011 249 11.99
2012 263 12.67 2013 255 12.28
2014 241 11.61
2015 218 10.50
2016 186 8.96
Total 2076 100
Panel C Sample Reduction Process
Observations
Observations available in the Thomson Reuters Asset4 (2002 – 2016) 2,639
LESS: missing data due to merging with Worldscope (191)
LESS: missing data due to merging with Morningstar (372)
Firm-year Observations for H1 2,076
LESS: missing data due to merge with I/B/E/S (9)
Firm-year Observations for H2 2,067
3.4.1 Corporate Sustainability Performance (CSP)
As suggested by Malik (2015) and Dragomir (2018), there are different ways to
operationalize sustainability performance. For instance, Galbreath and Shum (2012)
measure sustainability performance firm by firm by hiring experts’ opinion, and Lee,
Faff, and Langfield-Smith (2009), Humphrey, Lee, and Shen (2012) and Beck et al.
(2018) adopt ESG ratings from (rating) agencies to operationalize such performance.
As instructed by various seminal studies, including Ioannou and Serafeim (2010),
74 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Cheng et al. (2014), Eccles, Ioannou, and Serafeim (2014), Lys et al. (2015), Michelon,
Pilonato, and Ricceri (2015) and Liang and Renneboog (2017), this chapter measures
sustainability performance according to the ESG ratings assigned by the Thomson
Reuters Asset434 (i.e. Asset4). Asset4 has a multilevel structure in its assessment: at
the first level, there are more than 750 data points for firms in its universe; at the middle
level, these data points are synthesized into more than 250 performance indicators; and
at the very top level, performance indicators are synthesized into categories that are
composed of four pillars, (1) environmental performance, (2) social performance, (3)
corporate governance performance and (4) economic performance. In the Australian
literature, Asset4 ESG ratings have been used by Biswas et al. (2018), Nguyen et al.
(2018) and Krishnamurti, Shams, and Velayutham (2018) to operationalize Australian
firms’ sustainability performance.
While I acknowledge that the Asset4 considers firms’ disclosure in measuring
how firms perform regarding sustainability performance, it includes other sources,
including news, stock exchange filings and NGOs’ information. Following the studies
of Ioannou and Serafeim (2010), Cheng et al. (2014), Eccles et al. (2014) and Nguyen
et al. (2018) that also use the ESG ratings/ scores of Asset4 to measure sustainability
performance, I measure firms’ sustainability performance by averaging environmental
score/performance and social score/performance (i.e. the mean of the first two pillars).
It is noteworthy that the third pillar, corporate governance performance/ score, is also
included as control. Regarding sub-categories, environmental performance/ score
consists of three sub-categories: (1) emission reduction, (2) product innovation, and
(3) resource reduction; social performance/ score has six sub-categories: (1) product
responsibility, (2) diversity and opportunity, (3) health and safety, (4) community, (5)
training and development, and (6) employment quality; and, corporate governance
performance/ score has five sub-categories: (1) board functions, (2) board structure,
(3) compensation policy, (4) vision and strategy, and (5) shareholder rights. Although
I do not use economic performance/ score in Chapter 3, I still introduce sub-categories
of economic performance/ score for a comprehensiveness purpose: (1) performance,
34 More information about the Thomson Reuters Asset4 can be found on
https://libguides.mit.edu/sustainablebusiness/asset4 and https://www.sri-
connect.com/index.php?option=com_comprofiler&Itemid=4&task=userProfile&user=1007283, and
access date is 24 January 2019.
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 75
(2) shareholder loyalty, and (3) client loyalty. The earliest available data is from 2002,
and the latest data ceases in 2016. The sub-categories of first two pillars are presented
in Figure 3-1. Figure 3-2 presents the second two pillars of Asset4, namely corporate
governance performance/ score and economic performance/ score. More details about
Asset4 are presented in Appendix A.
76Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Figure 3-1 Asset4’s Scores Structure: Environmental Performance/Score and Social Performance/Score
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 77
Figure 3-2 Asset4’s Scores Structure: Corporate Governance Performance/Score and Economic Performance/Score
78 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
3.4.2 Textual Characteristics of Sustainability Disclosure
I extract sustainability disclosure from two mediums, standalone sustainability
reports and annual reports. If sample firms disclose sustainability information in two
mediums simultaneously, I consider standalone reports, as sustainability disclosure in
annual reports largely is summarised from/repeats the content of standalone reports.
Most of annual reports organize sustainability disclosure in individual sections with
very clear headings. Otherwise, Gray, Kouhy, and Lavers (1995a, 1995b), Clarkson et
al. (2008), Islam and McPhail (2011) and Global Reporting Initiative (2013b) are
consulted to examine which sections are relevant. It is noteworthy that this chapter
includes only words in its analysis, and pictures, figures and photos are disregarded.
Formatting in text (e.g. bold and font) are also disregarded. A sample of sustainability
disclosure analysed by this chapter is presented in Appendix B.
Standalone reports and relevant paragraphs in annual reports are converted to
TXT format and uploaded to the Diction 7 program for textual analysis. The reliability
and validity of Diction 7 has been assured, as seminal studies, including Short and
Palmer (2008), Henry (2006) and Henry and Leone (2016), have adopted this software
to perform textual analysis. Technical details about how it functions are provided in
Digitext (2015). As discussed in the introduction, Diction 7 measures the first six of
seven textual characteristics. The first three characteristics relate to content, namely
comprehensiveness of disclosure (measured by the number of words), amount of
quantitative information (measured by the score of numerical terms generated by the
Diction 7) and amount of environmental impact information (measured by number of
words).35 Comprehensiveness of disclosure (LENGTH) is calculated by Diction 7 for
each input. Aligning with Bagnoli, Hoffman, and Watts (2016), I measure the other
two constructs as the score of numerical terms and the z-score of frequency of key
words of environmental impact, respectively. Like LENGTH, they are outputs from
Diction 7.
The second three characteristics relate to tone of language in disclosure. As Cho
et al. (2010) instruct, optimism (OPTIMISM) and certainty (CERTAINTY) 36 refer to
35 This study does not consider social impact information, as there is no dictionary available in the
literature. 36 Following Cho et al. (2010, pp. 434), I consider optimism as “the bias toward reporting good news
coupled with a strategy that attributes positive performance to internal, corporate efforts”, and
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 79
the score of optimism and score of certainty, respectively, as calculated by Diction 7.
Following Resche (2004, 2015), minus one multiplied by the z-score of frequency of
key words of vagueness in language measures clarity (CLARITY) (i.e. −1 × the z −
score of frequency of key words about vagueness). An example of my outputs from
Diction 7 is presented in Appendix C.
Regarding readability of disclosure, sustainability disclosure is uploaded into the
R program for readability analysis. As instructed by Stone and Parker (2013) and Guay
et al. (2016), I extracted the first latent component from four readability indices,
namely the Flesch Reading Ease score (FRE), Coleman-Liau index (CLI), Flesch-
Kincaid Grade level (FKGL) and simple measure of gobbledygook (SMOG). This first
latent component is used as my measure of readability of sustainability disclosure. The
principal component analysis is provided in Appendix D.
3.4.3 Control Variables
Regarding control variables on sustainability performance, I control firm size
(SIZE), leverage (LEV), return on assets (ROA), newness of property, plant and
equipment (NEW), market-to-book ratio (MTB), capital expenditure (CAPEXP),
shareholding concentration (SHARECON), corporate governance (CG), presence of
social responsibility committee (CSR_C), existence of risk management committee
(RMC) and years of sustainability disclosure (YEAR_REPORT). A number of prior
studies, including Adams (2004), Al-Tuwaijri et al. (2004), Clarkson et al. (2008),
Clarkson et al. (2011), Delmas and Toffel (2011), Malik (2015), Dienes et al. (2016),
Khan, Serafeim, and Yoon (2016) and Jain and Jamali (2016), provide authority that
the above variables ought to be controlled. Larger firms are expected to have better
sustainability performance (Gallo & Christensen, 2011). Australian firms with higher
leverage or which incur more capital expenditure may invest less on sustainability, as
resources on hand can be restricted (Arora & Dharwadkar, 2011). Those with higher
market-to-book ratio may invest less on sustainability, as they hold more profitable
projects awaiting investment. Firms with the latest property, plant and equipment can
deliver better performance (Clarkson et al., 2008). As highlighted by Rankin et al.
(2011) and Jain and Jamali (2016), three governance variables are used as controls:
certainty as “language that indicates resoluteness, inflexibility, completeness, and a tendency to speak
ex cathedra”.
80 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
namely CSR_C, RMC and CG. Years of sustainability disclosure (YEAR_REPORT)
are also controlled, as firms with more experience tend to deliver better performance.
As Walls et al. (2012) and Jain and Jamali (2016) instruct, shareholding structure may
affect sustainability performance, and I control for shareholding concentration.
Regarding control variables on the first six textual characteristics of disclosure,
I control firm size (SIZE), leverage (LEV), market-to-book ratio (MTB), return on
assets (ROA), corporate governance (CG), presence of a risk management committee
(RMC), presence of a sustainability or social responsibility committee (CSR_C), and
shareholding concentration (SHARECON). Adams (2004), Delmas and Toffel (2011),
Malik (2015) and Dienes et al. (2016) provide authority that the aforementioned
variables ought to be controlled. Larger firms are more likely to assign resources to
sustainability disclosure (Patten, 2002). Leverage, market-to-book ratio and return on
assets may also reflect how firms allocate resources among different tasks, including
sustainability disclosure. As Jain and Jamali (2016) suggest, I control for shareholding
structure and corporate governance characteristics.
In terms of control variables relating to readability of sustainability disclosure, I
control firm size (SIZE), leverage (LEV), market-to-book ratio (MTB), return on
assets (ROA), number of analysts following (COVERAGE), cross listing (CROLIST),
and number of operational/business segments (BUSSEG). Loughran and McDonald
(2014b), Bonsall and Miller (2016) and Bushee et al. (2017) provide authority that the
aforementioned variables ought to be controlled. As Rutherford (2003), Lehavy et al.
(2011) and Jennings et al. (2014) suggest, I argue: firms with more business segments
disclose information that is more complex, reducing readability of disclosure without
strategic intention to do so. Variables and their measurements are presented in Table
3-2. Econometric models are explained in following section.
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 81
Table 3-2 Variables and Their Measurements Variable Abbr. Measurement Key Paper(s)
Sustainability Performance
Corporate
Sustainability
Performance
CSP Mean of environmental scores and social scores assigned by the Thomson Reuters Asset4 Ioannou and Serafeim (2010),
Cheng et al. (2014) and
Eccles et al. (2014)
Unexpected Part of
Sustainability
Performance
DA_CSP The unexpected/surprising part of sustainability performance reflects the variance in
sustainability performance that is not estimated by firm characteristics. This is the residual from
Equation (1).
Lys et al. (2015)
Textual Characteristics of Sustainability Disclosure
Amount of
Environmental Impact
Information
ENV_IM Frequency of key words about environmental impact calculated by Diction 7 (in z-score) Bagnoli et al. (2016)
Amount of
Quantitative
Information
NUMBER Score of numerical terms calculated by Diction 7 Bagnoli et al. (2016)
Comprehensiveness
of Sustainability
Disclosure
LENGTH Ln (Number of words) Cho et al. (2010)
Certainty in
Sustainability
Disclosure
CERTAINTY Certainty score calculated by Diction 7 Cho et al. (2010)
Clarity in
Sustainability Disclosure
CLARITY Frequency of key words about vagueness calculated by Diction 7 (in z-score) times minus one Resche (2004, 2015)
Optimism in
Sustainability
Disclosure
OPTIMISM Optimism score calculated by Diction 7 Cho et al. (2010) and Arena et
al. (2015)
Readability of
Sustainability
Disclosure
READ The first latent component extracted from four readability indices, namely Flesch Reading Ease
Score (FRE), Flesch-Kincaid Grade Level Score (FKGL), Coleman-Liau Index (CLI) and
Simple measure of Gobbledygook (SMOG), using principle component analysis. It is
noteworthy that to make interpretation easier and more consistent, this chapter times minus one
with some readability indices to make sure that the greater the readability score is, the sentence
is more readable.
Guay et al. (2016)
82Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Variable Abbr. Measurement Key Paper(s)
Control Variables on Sustainability Performance
Capital Expenditure CAPEXP Capital Expenditure
Total Assets
Clarkson et al. (2008) and
Clarkson et al. (2011)
Corporate
Governance Index
CG Corporate governance scores assigned by the Thomson Reuters Asset4 Rankin et al. (2011)
Experience of
Sustainability
Disclosure
YEAR_REPORT Number of years that a firm has released its sustainability disclosure Dienes et al. (2016)
Firm Size SIZE Ln Market Capitalization Clarkson et al. (2008) and
Clarkson et al. (2011)
Leverage LEV Total Liabilities
Total Assets
Dienes et al. (2016)
Market-to-book Ratio MTB Market Capitalization
Book Value
Dienes et al. (2016)
Newness of Property, Plant and Equipment
NEW Net Property, Plant and Equipment
Gross Property, Plant and Equipmen
Al-Tuwaijri et al. (2004) and Clarkson et al. (2008)
Return on Assets ROA Reported Net Profit After Tax
Total Assets
Al-Tuwaijri et al. (2004) and
Clarkson et al. (2008)
Risk Management
Committee
RMC Presence of a risk management committee Jain and Jamali (2016)
Shareholding
Concentration
SHARECON Percentage of ordinary shares owned by Top 20 shareholders Dienes et al. (2016)
Sustainability/ Social Responsibility
Committee
CSR_C Presence of a sustainability/social responsibility committee Jain and Jamali (2016)
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 83
Variable Abbr. Measurement Key Paper(s)
Control Variables on the First Six Textual Characteristics of Sustainability Disclosure
Corporate
Governance Index
CG Corporate governance scores assigned by Thomson Reuters Asset4 Rankin et al. (2011) and
Arena et al. (2015)
Firm Size SIZE Ln Market Capitalization Dienes et al. (2016), Cho et
al. (2010) and Arena et al.
(2015)
Leverage LEV Total Liabilities
Total Assets
Clarkson et al. (2008) and
Clarkson et al. (2011)
Market-to-book Ratio MTB Market Capitalization
Book Value
Dienes et al. (2016) and
Arena et al. (2015)
Return on Assets ROA Reported Net Profit After Tax
Total Assets
Al-Tuwaijri et al. (2004),
Clarkson et al. (2008), Cho et al. (2010) and Arena et al.
(2015)
Risk Management
Committee
RMC Presence of a risk management committee Jain and Jamali (2016)
Shareholding
Concentration
SHARECON Percentage of ordinary shares owned by Top 20 shareholders Dienes et al. (2016)
Sustainability/ Social
Responsibility
Committee
CSR_C Presence of a sustainability/social responsibility committee Jain and Jamali (2016)
84Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Variable Abbr. Measurement Key Paper(s)
Control Variables on Readability of Sustainability Disclosure
Analyst Coverage COVERAGE Number of analysts issuing earnings forecast for a firm in a year Bonsall and Miller (2016) and
Bushee et al. (2017)
Cross Listing CROLIST An indicator variable that takes one if a firm is listed on a foreign stock exchange. Bonsall and Miller (2016) and
Bushee et al. (2017)
Firm Size SIZE Ln Market Capitalization Bonsall and Miller (2016),
Bushee et al. (2017) and
Wang et al. (2018)
Leverage LEV Total Liabilities
Total Assets
Bonsall and Miller (2016),
Bushee et al. (2017) and
Wang et al. (2018)
Market-to-book Ratio MTB Market Capitalization
Book Value
Bonsall and Miller (2016) and Bushee et al. (2017)
Number of Business
Segment
BUSSEG Number of business segments Lehavy et al. (2011), Jennings
et al. (2014) and Wang et al.
(2018), Return on Assets ROA Reported Net Profit After Tax
Total Assets
Bonsall and Miller (2016) and
Bushee et al. (2017)
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 85
3.4.4 Econometric Models
Following Lys et al. (2015), I use a two-step approach to test two hypotheses.
The first equation aims to estimate the unexpected/surprising part of sustainability
performance (𝜀𝑖,𝑡), the residual of the first equation. Arguably, it is the unexpected part
of sustainability performance that needs to be better explained and provokes strategic
adjustments in sustainability disclosure. Thus, the unexpected part of performance is
tightly related to changes in textual characteristics of disclosure.
The second equation tests the relationship between the unexpected part of
performance and the seven textual characteristics of disclosure. If the dependent
variable is the amount of environmental-impact information, the unexpected part of
environmental performance is used. I use panel regression with robust standard errors
in the analyses, and time and industry fixed effects also are considered.
Regarding concerns relating to endogeneity, as suggested by Kennedy (2008),
Schultz, Tan, and Walsh (2010), Antonakis, Bendahan, Jacquart, and Lalive (2010),
Wintoki, Linck, and Netter (2012) and Gippel, Smith, and Zhu (2015), endogeneity is
due to several reasons, including omitted variables, omitted selection, simultaneity and
model misspecification. Arguably, by consulting the literature on sustainability and
using fixed effects, it is reasonable to suggest that omitted variables do not necessarily
cause endogeneity, as important control variables are included, and fixed effects are
considered. Moreover, focus on the unexpected part of sustainability performance
further minimizes effects of omitted variables. With respect to simultaneity, it is hard
to theoretically argue that unexpected part of sustainability performance and textual
characteristics of disclosure simultaneously cause each other. Following Arena et al.
(2015) and Lys et al. (2015), I apply the Granger Causality tests and alternative model
specification to mitigate the likelihood of endogeneity.
In terms of robustness tests, I use principal component analysis to re-measure
sustainability performance by extracting a latent component from nine sub-categories
mentioned in Section 3.5.1 and Figure 3-1. How three disclosure contexts, namely
sectoral environment, disclosure channels and time stability, influence relationships
between textual characteristics of disclosure and firms’ sustainability performance are
considered. Equations are presented below. The first equation is used to estimate the
86 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
unexpected part of performance37, the second equation is used to test the first
hypothesis (H1), and the third equation is used to test the second hypothesis (H2).
Findings are discussed in following section.
(1) 𝐶𝑆𝑃𝑖,𝑡 = 𝑏0 + 𝑏1𝑌𝐸𝐴𝑅_𝑅𝐸𝑃𝑂𝑅𝑇𝑖,𝑡 + 𝑏2𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑏3𝑅𝑂𝐴𝑖,𝑡 + 𝑏4𝑀𝑇𝐵𝑖,𝑡 + 𝑏5𝑁𝐸𝑊𝑖,𝑡 +
𝑏6𝐿𝐸𝑉𝑖,𝑡 + 𝑏7𝐶𝐴𝑃𝐸𝑋𝑃𝑖,𝑡 + 𝑏8𝐶𝐺𝑖,𝑡 + 𝑏9𝑆𝐻𝐴𝑅𝐸𝐶𝑂𝑁𝑖,𝑡 + 𝑏10𝐶𝑆𝑅_𝐶𝑖,𝑡 + 𝑏11𝑅𝑀𝐶𝑖,𝑡 +
𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡
(2) 𝐿𝐸𝑁𝐺𝑇𝐻 𝑜𝑟 𝑁𝑈𝑀𝐵𝐸𝑅 𝑜𝑟 𝐸𝑁𝑉_𝐼𝑀 𝑜𝑟 𝑂𝑃𝑇𝐼𝑀𝐼𝑆𝑀 𝑜𝑟 𝐶𝐸𝑅𝑇𝐴𝐼𝑁𝑇𝑌 𝑜𝑟 𝐶𝐿𝐴𝑅𝐼𝑇𝑌𝑖,𝑡 =
𝑏0 + 𝑏1𝐷𝐴_𝐶𝑆𝑃𝑖,𝑡 + 𝑏2𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑏3𝑅𝑂𝐴𝑖,𝑡 + 𝑏4𝑀𝑇𝐵𝑖,𝑡 + 𝑏5𝐿𝐸𝑉𝑖,𝑡 + 𝑏6𝐶𝐺𝑖,𝑡 +
𝑏7𝑆𝐻𝐴𝑅𝐸𝐶𝑂𝑁𝑖,𝑡 + 𝑏8𝐶𝑆𝑅_𝐶𝑖,𝑡 + 𝑏9𝑅𝑀𝐶𝑖,𝑡 + 𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡
(3) 𝑅𝐸𝐴𝐷𝑖,𝑡 = 𝑏0 + 𝑏1𝐷𝐴_𝐶𝑆𝑃𝑖,𝑡 + 𝑏2𝑀𝑇𝐵𝑖,𝑡 + 𝑏3𝐿𝐸𝑉𝑖,𝑡 + 𝑏4𝐵𝑈𝑆𝑆𝐸𝐺𝑖,𝑡 +
𝑏5𝐶𝑂𝑉𝐸𝑅𝐴𝐺𝐸𝑖,𝑡 + 𝑏6𝐶𝑅𝑂𝐿𝐼𝑆𝑇𝑖,𝑡 + 𝑏7𝑅𝑂𝐴𝑖,𝑡 + 𝑏5𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡
3.5 RESULTS
3.5.1 Descriptive Statistics
Descriptive statistics of the two samples and correlation matrix of key variables
are tabulated below. As Panel A of Table 3-3 indicates, independent and dependent
variables display much variance. It is interesting to identify that the first sample has a
higher optimism score (51.44) than the sample examined in Cho et al. (2010) whose
average optimism score is 48.21 and the sample used in Arena et al. (2015) whose
average optimism score is 46.81 (see Panel A, Table 3-3). The average readability of
sustainability disclosure in the second sample is not high. For instance, the mean of
the Flesch Reading Ease Score (FRE) is 33.78, suggesting that disclosure users make
significant effort to understand the disclosure (see Panel A, Table 3-3). As indicated
by Panel B of Table 3-3, over half of the sample firms have a risk management
committee, and about one fifth of sample firms have a social responsibility committee.
Compared with the samples examined in Clarkson et al. (2011) and Herbohn et al.
(2014), firms in this sample have lower return on assets yet comparable asset newness
(see Panel C of Table 3-3). Compared with the samples investigated in Lanis and
Richardson (2012a, 2012b), sample firms have a relatively higher leverage ratio. On
average, sample firms consist of five business segments and have about nine following
analysts (see Panel C, Table 3-3). The correlation matrix of variables is presented in
37 Unexpected part of sustainability performance (DA_CSP) is the residual from Equation (1).
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 87
Table 3-4. It is interesting to notice that firms’ sustainability performance is positively
related to the textual characteristics concerned in here.
Table 3-3 Descriptive Statistics Variables described in Table 3-2 except as follows. Instead of reporting ENV_IM and CLARITY,
frequency of key words regarding environmental impact and vagueness are presented. FRE is Flesch
Reading Ease Score. FKGL represents Flesch-Kincaid Grade Level Score. CLI is Coleman-Liau
Index, and SMOG represents a simple measure of Gobbledygook. Panel A represents key variables,
Panel B reports the presence of a risk management committee and of a social responsibility
committee, and Panel C shows control variables.
Panel A Key Variables
Variable No MEAN STD.DEV MIN MAX
CSP 2076 39.03 26.28 0 97.885 ENV_IM (Frequency of Key Words
about Environmental Impact)
2076 11.76 9.29 0 78.95
NUMBER 2076 20.40 26.29 0 363.64
LENGTH (Number of Words) 2076 4482.67 9311.52 11 112602
CERTAINTY 2076 49.72 4.74 25.32 69.32
CLARITY (Frequency of Key Words
about Vagueness)
2076 121.10 34.94 0 241.93
OPTIMISM 2076 51.44 2.35 42.89 58.96
A Sub-measure of READ: CLI 2067 15.14 15.44 0 472.80
A Sub-measure of READ: FKGL 2067 11.49 1.87 0 29.56
A Sub-measure of READ: FRE 2067 33.78 11.01 0 122.21 A Sub-measure of READ: SMOG 2067 13.32 1.62 0 24.50
Panel B Frequency of a Risk Management Committee and a Social Responsibility Committee in
the First Sample
TOTAL PERCENTAGE
CSR_C 362 17.44
RMC 1068 51.45
Panel C Control Variables
Variable No MEAN STD.DEV MIN MAX
BUSSEG 2067 4.76 2.45 0 10
COVERAGE 2067 8.99 4.86 0 23
CROLIST 2067 0.45 0.50 0 1
CAPEXP 2076 0.08 0.11 0.00 1.00
CG 2076 61.82 26.65 0.00 97.51
LEV 2076 0.45 0.24 0.004 1.32
Market Capitalization (in Billions) 2076 4.30 0.03 4.22 4.38 MTB 2076 2.12 2.91 -28.43 38.11
NEW 2076 0.63 0.23 0.00 1.00
ROA 2076 0.02 0.21 -1.69 2.54
SHARECON 2076 62.83 24.04 0.00 97.39
YEAR_REPORT 2076 4.02 3.21 0.00 14
88Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Table 3-4 Correlation Matrix of Variables A correlation matrix of variables is presented in this table. The variables tabulated below are described in Panel A and C of Table 3-2, as they are continuous variables.
Variables in Panel B of Table 3-2 are not included, as they are dummy variables. Variable CSP LENGTH NUMBER ENV IM OPTIMISM CERTAINTY CLARITY FRE FKGL SOMG CLI
CSP 1 LENGTH 0.457*** 1 NUMBER 0.245*** 0.268*** 1 ENV_IM 0.184*** 0.121*** 0.113*** 1
OPTIMISM -0.021 -0.112*** -0.071*** -0.030 1 CERTAINTY 0.318*** -0.260*** 0.457*** -0.104*** 0.000 1 CLARITY 0.129*** 0.201*** 0.229*** 0.030 -0.100*** 0.127*** 1 FRE 0.270*** 0.196*** 0.207*** -0.055*** 0.211*** -0.199*** 0.174*** 1 FKGL 0.284*** 0.235*** 0.228*** -0.033* 0.189*** -0.214*** 0.231*** 0.936*** 1 SOMG 0.270*** 0.292*** 0.268*** 0.003 0.090*** -0.256*** 0.288*** 0.600*** 0.812*** 1 CLI 0.032 0.154*** 0.040** -0.003 -0.023 -0.044** 0.064*** 0.110*** 0.144*** 0.215*** 1 SIZE 0.553*** 0.414*** 0.138*** 0.145*** -0.005 -0.24*** 0.079*** 0.178*** 0.195*** 0.206*** 0.030
LEV -0.112 -0.007 -0.013 -0.015 -0.023 0.008 -0.017 0.011 0.009 0.004 -0.001 ROA 0.024 -0.01 0.003 -0.013 0.005 -0.003 0.013 0.022 0.035* 0.036* -0.002 MTB 0.013 -0.022 -0.003 -0.021 -0.001 0.008 0.010 0.017 0.029 0.028 -0.003 NEW -0.124*** 0.007 -0.014 0.027 -0.024 0.021** -0.075*** -0.063*** -0.051*** 0.018 0.005 CAPEXP -0.010 -0.019 -0.006 -0.030 -0.003 0.013 0.009 0.005 0.019 -0.059*** -0.003 CG 0.555*** 0.316*** 0.183*** 0.137*** -0.005 -0.235*** 0.077*** 0.195*** 0.215*** 0.202*** 0.036* SHARECON 0.020 -0.019 0.002 -0.126*** 0.012 -0.028 0.007 0.015 0.014 0.011 0.015 YEAR_REPORT 0.483*** 0.291*** 0.182*** 0.096*** -0.051*** -0.229*** 0.116*** 0.138*** 0.152*** 0.159*** -0.005
CROLIST -0.034* -0.009 0.017 0.005 0.054*** 0.010 -0.007 0.041** 0.023 0.009 0.027 BUSSEG 0.444*** 0.286*** 0.106*** 0.081*** -0.016 -0.176*** 0.097*** 0.148*** 0.157*** 0.150*** 0.002 COVERAGE 0.495*** 0.293*** 0.168*** 0.102*** -0.017 -0.229*** 0.097*** 0.165*** 0.178*** 0.181*** 0.042**
SIZE LEV ROA MTB NEW CAPEXP CG SHARECON YEAR_REPORT CROLIST BUSSEG
SIZE 1 LEV -0.054*** 1 ROA 0.108*** -0.019 1
MTB 0.061*** -0.002 0.990*** 1 NEW -0.001 -0.128*** 0.086*** 0.086*** 1 CAPEXP 0.042** -0.001 0.981*** 0.991*** 0.117*** 1 CG 0.373*** -0.009 0.019 0.009 -0.109*** -0.001 1 SHARECON 0.019 -0.087*** -0.019 -0.024 -0.141*** -0.022 0.044** 1 YEAR_REPORT 0.304*** 0.014 0.039** 0.044** -0.202*** 0.018 0.355*** 0.077*** 1 CROLIST 0.030 -0.017 0.036* 0.036* 0.018 0.042** -0.048** 0.027 -0.150*** 1 BUSSEG 0.516*** -0.003 0.116*** 0.094*** -0.100*** 0.076*** 0.332*** 0.024 0.256*** 0.004 1
COVERAGE 0.653*** 0.315*** 0.092*** 0.064*** -0.122*** 0.040* 0.447*** 0.120*** 0.440*** -0.030 0.362***
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 89
3.5.2 Equation (1) – Unexpected Part of Sustainability Performance (DA_CSP)
Findings derived from Equation (1) are tabulated below. As indicated by Table
3-5, firm size (Serafeim, 2013), corporate governance (Walls et al., 2012), years of
sustainability disclosure, and the presence of a social responsibility committee (Rankin
et al., 2011) are positively related to sustainability performance. Leverage is negatively
related to firms’ sustainability performance. Sample firms with higher leverage hold
less organizational slack, restricting sustainability investment (Arora & Dharwadkar,
2011). Krishnamurti and Velayutham (2017) find the existence of a risk management
committee is related to the disclosure of greenhouse gas emissions, yet this board
committee is found to have insignificant active impact on such performance. In terms
of economic significance, a one standard-deviation increase in firm size relates to a
4.44% increase in the performance; and economic significance of the other significant
variables also is apparent. The findings in relation to two hypotheses are presented in
following section.
90 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Table 3-5 Equation (1) – Unexpected Part of Sustainability Performance (DA_CSP) This table presents findings regarding Equation (1) that aims to estimate the unexpected part of sustainability performance (DA_CSP). Variables in this table are described in Table 3-2. In terms of
model fit, the Equation (1) arguably is fit, as the adjusted R-square is 0.62 that is comparable with
adjusted R-squares reported by prior studies.
CSP
Coeff.
(t-stat)
YEAR_REPORT 4.32
(8.65)***
RMC 0.09
(0.10)
CSR_C 6.16
(2.66)***
SIZE 1.48
(2.49)** LEV -3.49
(-1.67)*
ROA 0.001
(0.09)
MTB 0.01
(0.52)
NEW -0.85
(-1.01)
CAPEXP -0.01
(-0.68)
CG 0.26 (9.49)***
SHARECON 0.02
(0.60)
CONS -22.78
(-3.27)***
Year FE YES
Industry FE YES
Observations 2076
Adjusted R-square 0.62
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
3.5.3 Equation (2) – H1
Findings of H1 are tabulated below. As indicated by Table 3-6 (column 1 – 6),
the unexpected part of sustainability performance (DA_CSP) positively relates to the
first six textual characteristics. In terms of economic significance38, a one standard-
deviation increase in DA_CSP is related to a 32% increase in sustainability disclosure
(LENGTH) and is related to a 3.72% increase in quantitative information (NUMBER).
A one standard-deviation rise in the unexpected part of environmental performance
38 In terms of how to calculate economic significance, this chapter follows Miller (2005) and Gul,
Hutchinson, and Lai (2013).
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 91
relates to an 18% increase in amount of environmental-impact information (ENV
_IM). A one standard-deviation increase in DA_CSP is related to a 65% increase in
tone of certainty (CERTAINTY), a 16% increase in tone of optimism (OPTIMISM)
and a 16% increase in tone of clarity (CLARITY). In terms of control variables, firm
size and status of corporate governance are positively related to the above textual
characteristics of disclosure. Thus, H1 is rejected.
92Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Table 3-6 H1 and H2 This table presents results regarding analysis of the relationship between the unexpected part of sustainability performance (DA_CSP) and the seven textual characteristics of
sustainability disclosure. The unexpected part of environmental performance is estimated by replacing sustainability performance with environmental performance in
Equation (1). Variables tabulated below are described in Table 3-2. In terms of model fit, Equation (2) is based on instruction from prior studies, and the proportion of
variance is comparable with proportion of variance explained by prior studies; Equation (3) is based on instruction from prior studies, and he proportion of variance is
comparable with proportion of variance explained by prior studies.
(1) (2) (3) (4) (5) (6) (7)
LENGTH NUMBER ENV_IM OPTIMISM CERTAINTY CLARITY READ
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
DA_CSP 0.02
(10.93)***
0.23
(3.95)***
0.01
(3.72)***
0.01
(2.53)**
0.04
(4.13)***
0.01
(4.08)***
0.017
(3.12)***
RMC -0.01
(-0.02)
-2.27
(-1.49)
0.03
(0.57)
0.30
(2.15)**
0.09
(0.35)
0.09
(1.81)*
-
CSR_C 0.42
(4.62)***
6.68
(1.89) *
0.05
(0.71)
0.38
(1.60)
-0.52
(-1.43)
0.14
(1.91)*
-
SIZE 0.30
(11.06)***
0.23
(3.95) ***
0.04
(1.88)*
0.09
(1.01)
0.03
(5.19)***
-0.04
(-1.58)
0.120
(1.89)*
LEV 0.16
(0.94)
-4.34
(-0.98)
0.04
(0.36)
-0.14
(-0.32)
0.04
(1.39)
0.08
(0.58)
0.012
(0.05)
ROA 0.00
(-0.90)
0.02
(0.81)
0.00
(0.23)
0.00
(0.94)
0.00
(1.08)
0.00
(-0.11)
0.129
(0.56)
MTB 0.00
(1.86)*
-0.01
(-0.43)
0.00
(0.31)
0.02
(2.19)**
0.00
(-0.63)
0.00
(0.60)
-0.000
(-0.75)
CG 0.00 (-1.98)*
0.10 (2.70)***
0.00 (-0.88)
0.002 (0.65)
-0.10 (-0.09)
0.00 (-0.67)
-
SHARECON 0.01
(7.43)***
-0.05
(-1.79)
0.00
(0.90)
0.001
(0.49)
0.01
(1.79)*
0.00
(-1.04)
-
CROLIST - - - - - - 0.067
(0.89)
BUSSEG - - - - - - -0.019
(-0.54)
COVERAGE - - - - - - 0.004
(0.29)
CONS 0.00 6.23 0.00 0.01 0.00 0.00 -2.937
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 93
(-2.12)** (0.32) (-2.50)** (1.80)* (-1.64) (-0.95) (-2.23)
Year FE YES YES YES YES YES YES YES
Industry FE YES YES YES YES YES YES YES
Observations 2076 2076 2076 2076 2076 2076 2067
Adjusted R-square 0.48 0.12 0.08 0.03 0.16 0.09 0.08
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
94 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
From a theoretical perspective, the above findings lend support to signalling
theory. Firms prepare their disclosure in a way that distinguishes themselves regarding
CSP. As Table 3-6 shows, firms with better sustainability performance (environmental
performance) disclose more sustainability information, more quantitative information
and more information in relation to environmental impact. They also communicate in
clear, optimistic and certain tones.
Regarding practical implications, the findings reported in Chapter 3 are related
to greenwashing, a practical phenomenon that has been discussed by researchers who
are interested in institutional theory. If greenwashing is defined as an intersection of
two activities, (1) worse sustainability performance and (2) positive disclosure about
sustainability performance (Delmas & Burbano, 2011), findings do not lend support
to the presence of greenwashing. If it includes “any communication that misleads
people into adopting overly positive beliefs about” a firm’s sustainability practices,
products and performance39 (Lyon & Montgomery, 2015, p. 226), the findings of
Chapter 3 are still insufficient, as identifying and quantifying how readers perceive
disclosure is required to detect greenwashing (this problem is outside of the scope of
this thesis). Findings of H2 are discussed in following section.
3.5.4 Equation (3) – H2
The findings of H2 are presented in Table 3-6. As presented in Table 3-6 (column
7), the unexpected part of sustainability performance (DA_CSP) is positively related
to readability of sustainability disclosure (READ). H2 is not rejected, as β = 0.017
(p<0.01). In other words, better performers communicate sustainability disclosure in a
more readable way. With respect to economic significance, a one standard-deviation
increase in DA_CSP is related to a 4.08% increase in READ. Findings are consistent
with the incomplete revelation hypothesis of Bloomfield (2002, 2008) wherein better
performers present disclosure in a more readable way so that their stakeholders more
easily understand their performance. What I found also is consistent with Wang et al.
(2018). As mentioned in Section 3.3, Wang et al. (2018), via analysing a quite small
US sample, identified a positive relationship between sustainability performance and
39 Two definitions about greenwashing are paraphrased from definitions proposed by Delmas and
Burbano (2011) and Lyon and Montgomery (2015), respectively, as their definitions consider
environmental performance only, rather than sustainability performance in a more inclusive way.
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 95
readability of sustainability disclosure. In the following sections, some robustness tests
are conducted to see whether the findings of the two hypotheses are robust.
3.5.5 Robustness Test One – Signalling Effect of Textual Characteristics in
Sustainability Disclosure
As the Eq (2) and (3) consider the relationship between textual characteristics
and the unexpected part of sustainability performance in the same period, this section
investigates whether the unexpected part of sustainability performance affects textual
characteristics in following periods, and vice versa. As Granger (1969), Granger and
Newbold (1974), Dufour and Taamouti (2010) and Arena et al. (2015) instruct, this
section uses panel Granger causality tests to check whether textual characteristics of
disclosure (LENGTH, NUMBER, ENV_IM, CLARITY, CERTAINTY, OPTIMISM
and READ) relate to performance in different periods, and vice versa. As Arena et al.
(2015) instruct, I consider one-year and two-year lags in these tests: performance may
affect textual characteristics of disclosure in the following year and two years, and vice
versa. Findings are presented below in Tables 3-7.
96Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Table 3-7 Signalling Effects of Textual Characteristics in Sustainability Disclosure This table presents the results of signalling effects of the seven textual characteristics on sustainability performance. Following Choi (2001), unit root tests for panel data are
conducted and reported in Panel A. Panel B presents results of panel Granger causality tests. One period of lag and two periods of lag are considered. In the Granger causality
test of ENV_IM, unexpected part of sustainability performance is replaced by unexpected part of environmental performance. Variables tabulated below are described in
Table 3-2.
Panel A: Fisher-type Augmented Dickey-Fuller Tests for Panel Data
Variable p-value
CERTAINTY 0.00
CLARITY 0.00
DA_CSP 0.00
ENV_IM 0.00
LENGTH 0.00
NUMBER 0.00
OPTIMISM 0.00 READ 0.00
Panel B: Granger Causality Tests (the Chi probability is reported)
Unexpected part of sustainability
performance does not Granger
cause a textual characteristic
(One Lag)
A textual characteristic does not
Granger cause unexpected part
of sustainability performance
(One Lag)
Unexpected part of sustainability
performance does not Granger
cause a textual characteristic
(Two Lag)
A textual characteristic does not
Granger cause unexpected part of
sustainability performance
(Two Lag)
CERTAINTY 0.357 0.812 0.558 0.950
CLARITY 0.186 0.814 0.401 0.597
ENV_IM 0.374 0.107 0.987 0.254
LENGTH 0.765 0.516 0.675 0.519
NUMBER 0.287 0.685 0.815 0.187
OPTIMISM 0.738 0.907 0.985 0.512
READ 0.721 0.129 0.219 0.176
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 97
Panel A of Table 3-7 presents the Augmented Dickey-Fuller test (Choi, 2001):
the variables concerned are stationary. Panel B of Table 3-7 presents the findings of
the panel Granger causality tests. With respect to the first six textual characteristics, as
the critical value for one period of lag is 𝜒2 (1, N = 2076) = 3.841 and for two periods
of lag is 𝜒2 (1, N = 2076) = 5.991, it is obvious that there is no relationship between
sustainability performance and the lags in different time periods. Similar findings
regarding the seventh textual characteristic are also revealed: as the critical value for
one period of lag is 𝜒2 (1, N = 2067) = 3.841 and for two periods of lag is 𝜒2 (1, N =
2067) = 5.991, there is no relationship between sustainability performance and the
seventh characteristic over different time periods. Thus, the findings of two hypotheses
are substantiated.
3.5.6 Robustness Test Two – Alternative Measurement on Sustainability
Performance
In the main analysis of that two hypotheses, firms’ sustainability performance is
measured as an average of social score and environmental score. I use the principal
component analysis to extract a latent component from nine sub-categories which are
composed of a social score and an environmental score (see Section 3.4.1and Figure
3-1). It is used as the alternative measurement on sustainability performance in Chapter
3. The findings are presented below. As Table 3-8 indicates, the findings about the two
hypotheses remain qualitatively unchanged.
98Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Table 3-8 Alternative Measurement on Sustainability Performance This table presents the results of the relationship between unexpected part of sustainability performance and seven textual characteristics of sustainability disclosure. Panel A
shows alternative measurement of sustainability performance based on the principal component analysis. Panel B shows the results of the relationship between alternative
measurement on the unexpected part of sustainability performance and seven textual characteristics of sustainability disclosure. Environmental performance is calculated by
extracting a latent component from the three sub-categories comprising it. The unexpected part of environmental performance is estimated by replacing sustainability
performance with environmental performance in Equation (1).
Panel A: Principal Component Analysis on Nine Sub-Categories of Sustainability Performance
Sub-Categories Eigenvalue Loading Proportion Cumulative
Resource Reduction 4.974 0.55 0.553 0.553
Emission Reduction 0.749 0.08 0.083 0.636
Product Innovation 0.718 0.08 0.080 0.716
Employment Quality 0.628 0.07 0.070 0.786
Health and Safety 0.510 0.06 0.057 0.842
Training and Development 0.485 0.05 0.054 0.896 Diversity and Opportunity 0.377 0.04 0.042 0.938
Community 0.374 0.04 0.042 0.980
Product Responsibility 0.184 0.02 0.021 1.000
Panel B: Panel Regression
LENGTH NUMBER ENV_IM OPTIMISM CERTAINTY CLARITY READ
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
DA_CSP (Alternative) 0.31
(10.36)***
2.90
(5.02)***
0.09
(3.83)***
0.11
(1.72)*
0.03
(4.97)***
0.07
(3.43)***
0.022
(3.12)***
RMC 0.02
(0.25)
-1.60
(-1.17)
0.03
(0.46)
0.27
(1.92)*
-0.03
(-0.25)
0.08
(1.72)*
-
CSR_C 0.17
(1.43)
3.47
(1.38)
0.03
(0.36)
0.45
(1.88)*
0.01
(0.49)
0.14
(1.89)*
-
SIZE 0.20
(6.08)***
0.31
(0.41)
0.02
(0.53)
0.11
(1.24)
0.02
(2.88)***
0.03
(1.45)
0.077
(1.59)
LEV -0.02
(-0.11)
-3.68
(-1.09)
0.01
(0.04)
-0.11
(-0.24)
0.02
(0.59)
0.09
(0.07)
0.072
(0.32)
ROA -0.00
(-1.01)
0.01
(0.37)
0.00
(0.03)
0.00
(0.90)
0.00
(0.85)
0.00
(0.07)
0.069
(0.30)
MTB 0.00
(0.95)
-0.01
(-0.51)
0.00
(0.41)
0.02
(2.22)**
-0.00
(-0.74)
0.00
(0.73)
-0.000
(-1.10)
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 99
CG 0.01
(3.09) ***
0.02
(0.52)
0.00
(0.22)
0.002
(0.84)
0.00
(0.48)
-0.00
(-0.94)
-
SHARECON 0.01
(1.23)
-0.05
(-1.97)*
-0.00
(-1.92)
0.01
(1.89)*
-0.01
(-1.34)
-0.00
(-0.87)
-
CROLIST - - - - - - 0.087
(1.29)
BUSSEG - - - - - - -0.022
(-0.78)
COVERAGE - - - - - - 0.002
(0.13)
CONS 0.00 (-2.12)**
7.09 (1.09)
0.29 (-0.45)
8.29 (28.45)***
-1.25 (-10.33)***
0.03 (-0.05)
-1.888 (-1.86)
Year FE YES YES YES YES YES YES YES
Industry FE YES YES YES YES YES YES YES
Observations 2076 2076 2076 2076 2076 2076 2,067
Adjusted R-square 0.50 0.12 0.09 0.01 0.16 0.10 0.13
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
100 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
3.5.7 Robustness Test Three – Sectoral Analysis
Following Cho and Patten (2007) and Eccles et al. (2014), this test categorises
the GICS industries into two pairs of categories, (1) natural versus non-natural40; (2)
business-to-consumer (B2C) and others41. In terms of the first pair, I code the value of
one for industries whose products are deemed as sensitive to sustainable development
(the natural industries), and the value of zero otherwise (the non-natural industries)
(De Villiers, Naiker, & Van Staden, 2011). It is argued that firms in the natural
industries are subject to more pressures relevant to sustainability (Cho, Laine, Roberts,
& Rodrigue, 2015) so that the relationship between how firms communicate about
sustainability and how firms perform sustainability can consequentially be affected by
such pressures. With respect to the second pair, the value of one is coded for B2C
industries and zero otherwise. Following Eccles et al. (2014), it is argued that firms in
the B2C industries are more visible as they directly interact with consumers. Thus,
firms in the B2C industries are more likely to care about their image and reputation
than their peers in other industries. The relationship between textual characteristics
and performance can be affected by such concerns. The findings are presented in Table
3-9. Panel A of Table 3-9 shows natural versus non-natural, and Panel B of Table 3-9
reports B2C versus others.
40 Following de Villiers, Naiker and Van Staden (2011, p. 1650), natural industries include forestry,
metal mining, coal mining and oil and gas exploration, paper and pulp mills, chemicals,
pharmaceutical and plastics manufacturing, iron and steel, manufacturing and electricity, gas and
wastewater. 41 Following Eccles et al. (2014, p. 2850), B2C industries include consumer goods and finance.
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 101
Table 3-9 Sectoral Analysis This table presents the results of sectoral moderation effects on the relationship between unexpected part of sustainability performance and seven textual characteristics of
sustainability disclosure. They are the number of words (LENGTH), the amount of quantitative information (NUMBER), the amount of environmental impact information
(ENV_IM), optimism (OPTIMISM), certainty (CERTAINTY), clarity (CLARITY) and readability (READ). Panel A presents how industry affiliation based on natural versus
non-natural affects the relationship between performance and textual characteristics. Natural is coded as a dummy variable – firms in natural industries are coded one, and
zero otherwise. Panel B presents how industry affiliation based on B2C versus others affects such relationship. B2C is coded as a dummy variable – firms in B2C industries
are coded one, and zero otherwise. Variables tabulated below are described in Table 3-2. Panel A Natural versus Non-natural
LENGTH NUMBER ENV_IM OPTIMISM CERTAINTY CLARITY READ
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
DA_CSP 0.14 (2.75)***
0.27 (3.79)***
0.01 (2.69)***
-0.01 (-1.22)
0.14 (2.75)***
0.01 (4.20)***
0.028 (2.93)***
Natural -0.43 (-1.16)
4.01 (1.34)
-0.08 (-0.64)
0.10 (0.30)
-0.43 (-1.16)
-0.21 (-1.28)
0.146 (0.13)
Natural × DA_CSP 0.09 (1.12)
-0.09 (-0.76)
0.00 (-0.14)
0.03 (2.98)***
0.09 (1.12)
0.004 (1.29)
-0.013 (-1.45)
Controls included YES YES YES YES YES YES YES Year FE YES YES YES YES YES YES YES
Observations 2076 2076 2076 2076 2076 2076 2067 Adjusted R-square 0.16 0.12 0.08 0.04 0.16 0.10 0.02
Panel B B2C versus Others
LENGTH NUMBER ENV_IM OPTIMISM CERTAINTY CLARITY READ
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
DA_CSP 0.02
(9.11)***
0.18
(2.55)**
0.01
(2.58)**
0.01
(2.66)***
0.21
(4.39)
0.01
(2.32)**
0.016
(1.65)* B2C 0.02
(0.10) 0.81
(0.25) 0.44
(2.94)*** -0.77
(-1.97)** 0.34
(0.86) -0.12
(-0.62) -0.484 (-0.43)
B2C × DA_CSP 0.003 (0.60)
0.15 (1.12)
0.003 (0.86)
-0.03 (-3.20)***
-0.09 (-1.05)
0.01 (2.07)**
0.023 (2.49)**
Controls included YES YES YES YES YES YES YES Year FE YES YES YES YES YES YES YES
Observations 2076 2076 2076 2076 2076 2076 2067
Adjusted R-square 0.48 0.11 0.10 0.05 0.16 0.10 0.01
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
102 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Regarding natural versus non-natural affiliation, this chapter does not find that
the sectoral environment of the natural industries influences the relationship between
performance and disclosure characteristics except for optimistic tone of language. As
Panel A of Table 3-9 indicates, firms in the natural industries are likely to use more
optimistic tone of language than their peers in non-natural industries. As Clarkson et
al. (2011), Cho et al. (2010) and Patten (2002) instruct, industrial pressures can be a
key factor affecting the relationship between textual characteristics and performance.
This finding is in line with the expectation that firms in natural industries are subject
to more external pressures to demonstrate sustainability and face more scrutiny of their
sustainability practices, leading them to communicate in a more optimistic way.
Regarding B2C versus other affiliation, this chapter identifies that the sectoral
environment of B2C industries affects optimism, clarity and readability. As indicated
by Panel B of Table 3-9, firms in B2C industries are less likely to use an optimistic
tone of language and are more likely to present information in a clearer manner than
their peers in other sectors. As expected, firms in B2C sectors care more about their
public image and are likely to be more cautious (less use of optimistic tone) and clearer
in their disclosure. Moreover, firms in B2C industries do pay more attention on how
to present sustainability disclosure so that their disclosure is more readable. Thus, the
sectoral environment seems to influence the relationship between disclosure and
performance. As prior studies that analyse linguistic characteristics in disclosure,
including Cho et al. (2010) and Arena et al. (2015), incorporate annual reports only,
Chapter 3 explores whether a separation of annual report and standalone report affects
the findings in following section.
3.5.8 Robustness Test Four – Disclosure Channels
Chapter 3 further examines whether findings about the two hypotheses are
sensitive to various disclosure channels. Arguably, compared to putting sustainability
disclosure in annual reports, releasing standalone reports is a more proactive way of
communicating sustainability practices42. The use of standalone reports demonstrates
that firms that prepare them are more interested in sustainability communication. Thus,
42 A standalone report represents “a very clear engagement by corporations with the increasingly
critical issues of environmental stewardship, social responsibility, and planetary sustainability at a
time when society’s well-being and the planet itself are under unique levels of threat” (Gray &
Herremans, 2011, pp. 2-3).
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability
Performance 103
disclosure medium may affect the relationship between sustainability performance and
textual characteristics. Sample firms are divided into two groups that are determined
by whether they release a standalone report in a year. As presented in Table 3-10,
reporting practices between firms that use standalone reports and firms that do not use
them are very similar, except for three characteristics (i.e. LENGTH, OPTIMISM and
CLARITY). Firms that use standalone reports tend to disclose more comprehensive
information, which is presented in more optimistic terms and communicated in clearer
tones. The findings are consistent with prior literature, including Gray and Herremans
(2011) and Higgins et al. (2015), which highlights that the use of standalone report
demonstrates a proactive attitude towards sustainability communication and/or desire
to improve corporate reputation.
104Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Table 3-10 Disclosure Channels: Standalone Report versus Annual Report This table presents the results of whether use of standalone reports affects relationship between unexpected part of sustainability performance and the seven textual
characteristics of sustainability disclosure, namely the number of words (LENGTH), the amount of quantitative information (NUMBER), the amount of environmental impact information (ENV_IM), optimism (OPTIMISM), certainty (CERTAINTY), clarity (CLARITY) and readability (READ). In the analysis of ENV_IM, the unexpected part of
sustainability performance is replaced by the unexpected part of environmental performance. Variables tabulated below are described in Table 3-2. A dummy variable,
Dummy for Use of Standalone Report, is coded the value of one for the use of a standalone report in a firm-year observation, and the value of zero otherwise.
LENGTH NUMBER ENV_IM OPTIMISM CERTAINTY CLARITY READ
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
DA_CSP 0.02
(8.36)***
0.01
(2.17)**
0.01
(1.40)
0.01
(0.69)
0.14
(2.41)**
0.01
(2.08)**
0.023
(2.12)**
Dummy for Use of Standalone Report 0.53
(6.27)***
0.34
(5.06)***
0.20
(2.85)**
0.51
(2.37)**
-0.15
(-0.33)
0.22
(3.14)***
0.723
(1.50)
Dummy for Use of Standalone Report × DA_CSP 0.01
(2.18)**
0.03
(0.92)
0.01
(1.21)
0.02
(1.85)*
0.05
(0.47)
0.01
(1.16)**
-0.011
(-1.21)
Controls included YES YES YES YES YES YES YES
Year FE YES YES YES YES YES YES YES Industry FE YES YES YES YES YES YES YES
Observations 2076 2076 2076 2076 2076 2076 2067
Adjusted R-square 0.50 0.14 0.10 0.05 0.17 0.11 0.01
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability
Performance 105
3.5.9 Robustness Test Five – Time Stability
While Australia maintains a voluntary disclosure status in relation to corporate
sustainability during this sample period, it is reasonable to argue disclosure practice
may change over 15 years. As discussed in the introduction, the increased awareness
of corporate sustainability and availability of increased sustainability guidance were
observed during this 15-year period. Therefore, it is possible that findings of the two
hypotheses may change over time. This test selects the first five years (2002 – 2006)
and the last five years (2012 – 2016) to examine time stability. Observations of the
first five years are coded as zero, and ones of the last five years are coded as one. As
Table 3-11 reports, two characteristics of sustainability disclosure change over this
sample period: firms tend to disclose more information about environmental impact
and present their information in clearer terms. I also re-run the main analysis on the
data from 2010 to 2016, which consists of about 80% of both final samples, and the
results remain qualitatively unchanged.
106Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Table 3-11 Time Stability This table presents the results about whether time affects the relationship between the unexpected part of sustainability performance and the seven textual characteristics in
sustainability disclosure, namely the number of words (LENGTH), the amount of quantitative information (NUMBER), the amount of environmental impact information
(ENV_IM), optimism (OPTIMISM), certainty (CERTAINTY), clarity (CLARITY) and readability (READ). In the analysis of ENV_IM, the unexpected part of sustainability
performance is replaced by the unexpected part of environmental performance. Variables tabulated below are described in Table 3-2. The first five years (2002 – 2006) and
the last five years of the sample period (2012 – 2016) are selected to test time stability. A dummy variable (Dummy of Time Periods) is introduced: observations of the first
five years are coded as zero, and observations of the last five years are coded as one.
LENGTH NUMBER ENV_IM OPTIMISM CERTAINTY CLARITY READ
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
DA_CSP 0.02
(3.56)***
0.02
(0.15)
0.01
(0.70)
0.01
(0.85)
0.05
(0.48)
-0.01
(-0.56)
0.032
(1.85)*
Dummy of Time Periods 0.99
(6.62)***
0.73
(1.65)
0.33
(2.45)**
-1.21
(-3.63)***
-0.64
(-1.14)
0.29
(2.29)**
1.618
(1.64) Dummy of Time Periods × DA_CSP -0.02
(-0.54)
0.11
(0.72)
0.01
(1.76)*
0.02
(1.44)
0.15
(1.22)
0.01
(2.34)**
-0.030
(-1.60)
Controls included YES YES YES YES YES YES YES
Industry FE YES YES YES YES YES YES YES
Year FE NO NO NO NO NO NO NO
Observations 2076 2076 2076 2076 2076 2076 2067
Adjusted R-square 0.04 0.04 0.03 0.05 0.04 0.04 0.11
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level…………………
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability
Performance 107
3.5.10 Robustness Test Six – Alternative Model Specification
This chapter provides additional assurance that the findings regarding H1 and
H2 are not due to an incomplete Equation (1) by estimating an alternative equation
that includes all public information – the values of each of the variables in Table 3-5
and information on past sustainability performance. I estimate this recursive equation
by including lagged values of the unexpected part of sustainability performance in
Table 3-5 as additional explanatory variables in Equation (1). As Lys et al. (2015)
instruct, I follow this approach, as the information about sustainability performance
that is not contained in the explanatory variables is reflected in lagged values of the
unexpected part of performance. The advantage of the recursive approach is that it
allows one to take into account the relatively sticky nature of corporate sustainability
and unobservable firm characteristics. The updated Equation (1) 43 is presented below.
(4) 𝐶𝑆𝑃𝑖,𝑡 = 𝑏0 + 𝑏1𝑌𝐸𝐴𝑅_𝑅𝐸𝑃𝑂𝑅𝑇𝑖,𝑡 + 𝑏2𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑏3𝑅𝑂𝐴𝑖,𝑡 + 𝑏4𝑀𝑇𝐵𝑖,𝑡 + 𝑏5𝑁𝐸𝑊𝑖,𝑡 +
𝑏6𝐿𝐸𝑉𝑖,𝑡 + 𝑏7𝐶𝐴𝑃𝐸𝑋𝑃𝑖,𝑡 + 𝑏8𝐶𝐺𝑖,𝑡 + 𝑏9𝑆𝐻𝐴𝑅𝐸𝐶𝑂𝑁𝑖,𝑡 + 𝑏10𝐶𝑆𝑅_𝐶𝑖,𝑡 + 𝑏11𝑅𝑀𝐶𝑖,𝑡 +
𝑏12𝐷𝐴_𝐶𝑆𝑃𝑖,𝑡−1 + 𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡
As Table 3-12 shows, the coefficient of the one-year lagged unexpected part of
sustainability performance is highly significant and equal to 3.328. The explanatory
power of the recursive equation is substantially higher than the Equation (1) in Table
3-12 with a R-squared of 89% versus 62% in Table 3-5. I re-run Equation (2) and (3)
using the unexpected part of performance determined using Equation (4). As Table 3-
12 presents, the findings regarding H1 and H2 remain qualitatively unchanged.
43 The lagged values of the unexpected part of sustainability performance (DA_CSP) are incorporated
into the Equation (4).
108Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Table 3-12 Alternative Model Specification This table presents the results from alternative model specification. This alternative specification includes the lagged values of the unexpected part of sustainability
performance in Table 3-5 as additional explanatory variables in Equation (1). Seven textual characteristics in sustainability disclosure, namely number of words (LENGTH),
amount of quantitative information (NUMBER), amount of environmental impact information (ENV_IM), optimism (OPTIMISM), certainty (CERTAINTY), clarity
(CLARITY) and readability (READ) are included. In the analysis of ENV_IM, the unexpected part of sustainability performance is replaced by the unexpected part of
environmental performance. Variables tabulated below are described in Table 3-2.
Panel A Equation (4)
CSP
Coeff.
(t-stat)
One-year Lagged DA_CSP 3.328
(4.24)***
Other Variables of Equation (1) Included YES
Year FE YES Industry FE YES
Observations 2076
Adjusted R-square 0.89
Panel B Equation (2) and (3) including the Unexpected Part of Sustainability Performance Estimated by Using Equation (4)
LENGTH NUMBER ENV_IM OPTIMISM CERTAINTY CLARITY READ
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
DA_CSP 0.01
(2.67)***
0.68
(2.31)**
0.01
(2.87)***
0.01
(1.96)*
0.02
(3.52)***
0.04
(1.90)*
0.021
(3.28)***
Controls included YES YES YES YES YES YES YES
Industry FE YES YES YES YES YES YES YES
Year FE YES YES YES YES YES YES YES
Observations 2076 2076 2076 2076 2076 2076 2067 Adjusted R-square 0.46 0.09 0.09 0.01 0.15 0.12 0.08
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability
Performance 109
3.5.11 Robustness Test Seven – Inclusion of Firms’ Experience of Sustainability
Disclosure as a Control
This chapter provides additional assurance that the findings of H1 and H2 are
not caused by excluding the experience of sustainability disclosure (YEAR_REPORT)
as a control. I re-estimate Equation (1) and (2) to include the experience of
sustainability disclosure (YEAR_REPORT) as a control. As Table 3-13 shows, the
findings of H1 and H2 remain qualitatively unchanged.44
44 I appreciate this suggestion from the thesis examiner.
110Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
Table 3-13 Inclusion of Firms’ Experience of Sustainability Disclosure as a Control This table presents the results from including firms’ experience of sustainability disclosure (YEAR_REPORT) as a control. Seven textual characteristics in sustainability
disclosure, namely number of words (LENGTH), amount of quantitative information (NUMBER), amount of environmental impact information (ENV_IM), optimism
(OPTIMISM), certainty (CERTAINTY), clarity (CLARITY) and readability (READ) are included. In the analysis of ENV_IM, the unexpected part of sustainability
performance is replaced by the unexpected part of environmental performance. Variables tabulated below are described in Table 3-2.
LENGTH NUMBER ENV_IM OPTIMISM CERTAINTY CLARITY READ
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
DA_CSP 0.02
(11.23)***
0.24
(5.38)***
0.01
(3.93)***
0.01
(2.30)**
0.02
(4.41)***
0.01
(4.11)***
0.02
(3.15)***
YEAR_REPORT 0.12
(4.84)***
0.83
(1.77)
0.07
(3.50)***
0.08
(0.35)
0.01
(1.77)*
0.04
(1.58)
-0.07
(-1.27)
Constant and other Controls Included YES YES YES YES YES YES YES
Year FE YES YES YES YES YES YES YES Industry FE YES YES YES YES YES YES YES
Observations 2076 2076 2076 2076 2076 2076 2067
Adjusted R-square 0.50 0.12 0.09 0.03 0.16 0.10 0.08
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability
Performance 111
3.6 DISCUSSION AND CONCLUSION
Chapter 3 addresses the research question one: whether and how is an Australian
firm’s sustainability performance associated with its sustainability disclosure? It does
this by analysing the relationship between firms’ sustainability performance and
sustainability disclosure. Seven textual characteristics regarding sustainability
disclosure, amount of disclosure, amount of quantitative information in disclosure,
amount of information in relation to environmental impact, tone of optimism in
disclosure, tone of certainty in disclosure, tone of clarity in disclosure, and readability
of disclosure, are used as variables of interest.
The first hypothesis posits that there is no relationship between the first six
textual characteristics and performance, and the second hypothesis posits a positive
relationship between readability and performance. Analysing an unbalanced panel set
of data, the results reveal that better performing firms prepare more comprehensive
disclosure, environmental-impact information and quantitative information; they also
communicate in an optimistic, certain, clear and more readable way. The findings are
consistent with Herbohn et al. (2014) who sampled data from 2006 and examined the
environmental dimension of sustainability and Lanis and Richardson (2012b) who
found a positive relationship between sustainability performance and sustainability
disclosure (albeit both studies used a narrow scope of sustainability performance).
These findings do not necessarily contradict Clarkson, Overell et al. (2011),
Mitchell et al. (2006) and Deegan and Rankin (1996), who identified a negative
relationship between disclosure content and performance in Australia. First, samples
analysed in this study are different from those examined by prior literature. Secondly,
measuring sustainability performance using different methods may be another reason
for the inconsistent findings. These findings also do not necessarily contradict the US
studies which examine tone of language in disclosure. Although Cho et al. (2010) and
Arena et al. (2015) find a negative relationship between optimism of disclosure and
performance, the inconsistencies may be attributed to sample selection. Future studies
are encouraged to explore reasons behind the conflicting findings.
Extending prior literature, including Higgins et al. (2015), Eccles et al. (2014)
and Cho and Patten (2007), various robustness tests are performed. Granger causality
tests were used to test the signalling effects of textual characteristics on performance
112 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance
in different periods, and these tests do not report any signalling effect. Sectoral analysis
was also performed and revealed that firms in the natural industries tend to use a more
optimistic tone, and firms in the B2C industries communicate in a more cautious,
readable and clear way. At a comparable level of sustainability performance, firms that
release standalone reports present in a more optimistic and clear way and disclose more
comprehensive information. Firms are found to increasingly disclose information
about environmental impact and present sustainability disclosure in a clearer way over
the 15 years’ sample period. An alternative measurement of sustainability performance
was used to check whether the findings are sensitive to other measurements, and an
alternative model was used to mitigate the endogeneity concern. Findings are robust
to this alternative performance measurement and alternative model specification.
From the theoretical perspective, there are two theories relevant to my research
question. Institutional theory assumes that sustainability disclosure is used to mitigate
pressures due to institutions with regard to corporate sustainability. Signalling theory
posits that sustainability disclosure is used to signal firms’ sustainability performance.
The findings substantiate signalling theory in that firms use sustainability disclosure
to distinguish themselves in their sustainability performance. As this chapter’s findings
align with Wang et al. (2018) and identify a positive relationship between readability
and performance in the US, the incomplete revelation hypothesis (Bloomfield, 2002,
2008) is also supported by these results. In terms of contribution to literature, Chapter
3 provides more insights to sustainability communication by using linguistic analytical
techniques (Tregidga et al., 2012).
Following prior literature, including Wang et al. (2018), Bagnoli et al. (2016),
Arena et al. (2015) and Cho et al. (2010), which examine disclosure from linguistic
perspectives, this chapter provides additional empirical evidence about the relationship
between how firms present and perform sustainability. This chapter also extends the
scope of linguistic analysis from financial and accounting disclosure to sustainability
disclosure. Chapter 3 generates practical implications. It is reasonable to suggest that
disclosure users are expected to better understand sustainability disclosure and easily
extract useful information from the disclosure by good performers (their sustainability
disclosures are more readable), and the disclosure released by bad performers seems
to be harder to digest (their sustainability disclosures are less readable). Disclosure by
bad performers may be not sufficiently comprehended by users, potentially leading to
Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability
Performance 113
biased decisions made by disclosure users. Aligning with Loughran and McDonald
(2014a, 2014b, 2016), this chapter encourages some regulatory guidance of disclosure
readability and assurers’ attention towards sustainability disclosure readability.
This chapter has four main limitations. First, findings in the Australian context
are generalizable to the extent of consistency of regulatory framework. Future studies
are encouraged to investigate this relationship in countries where the socio-political
environment of sustainability practice is different from that in Australia. For example,
future studies may investigate whether mandatory sustainability disclosure introduced
in some countries influences the relationship between what are disclosed and what are
performed. Secondly, this chapter measures textual characteristics in word-frequency
way. Following Loughran and McDonald (2016), I also encourage future research to
explore other ways (e.g. machine learning) to measure them. Thirdly, Chapter 3 does
not consider the effects of textual characteristics on disclosure users. Although this is
not within the scope of this thesis, future research may understand how disclosure users
react to textual characteristics concerned. For example, doing experiments with users
of sustainability disclosure can shed light on how textual characteristics of disclosure
affect their perceptions to firms’ sustainability performance. Last, this chapter reveals
that sustainability disclosure does not hide poor performance, yet it is uncertain
whether firms boast their performance in sustainability disclosure at a level that
misleads users of disclosure. In this context, boast refers to firms overly positively
present their sustainability performance. Again, future studies are encouraged to use
experimental design to explore this concern.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 115
Chapter 4: The Sustainability Committee,
Experience of Sustainability Disclosure and
Sustainability Performance
4.1 INTRODUCTION
As Chapter 1 illustrates, corporate sustainability includes economic prosperity,
social equity, and environmental integrity (Bansal, 2005). Prior literature emphasises
environmental and social impact due to firms’ operational activities (Dahlsrud, 2008).
Corporate sustainability has been endorsed by a number of international organizations,
including the United Nations. Australia has adopted global commitments. For instance,
a formal network for Australian signatories to the UN Global Compact, an initiative
that promotes corporate sustainability, was launched in 2009. Additionally, corporate
sustainability also has been undertaken by more Australian firms. For example, the
global surveys of KPMG (2013, 2015, 2017) and a series of surveys conducted by
Australian Council of Superannuation Investors (2012, 2013, 2014, 2015, 2016, 2017)
reveal that more Australian firms are engaging in corporate sustainability. A
meaningful question arises that how the sustainability performance of Australian firms
would be improved.
Several avenues of improvement are currently used by firms. For instance, a C-
suite officer (i.e. chief sustainability officer) (Miller & Serafeim, 2015) and a board
committee devoted to sustainability (a corporate social responsibility or sustainability
committee) are governance mechanisms used by firms looking to strengthen corporate
sustainability. In the literature, the board committee devoted to sustainability has been
researched by only few studies. For example, Rodrigue et al. (2013) find that existence
of the board committee is irrelevant to environmental performance, yet Dixon-Fowler
et al. (2017) report a positive relationship between existence of the board committee
and firms’ environmental performance. Thus, as an advisory to the board of directors
and senior management regarding sustainability issues (Peters & Romi, 2014, 2015),
116 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
the sustainability committee45 and its influence on sustainability performance needs
more efforts to research. For Australian firms, sustainability committee is a voluntary
governance choice. There are few Australian studies about various characteristics of
sustainability committee and how the committee characteristics are related to corporate
sustainability. The committee has a very long history in Australia. For example, CSR
Limited formed such a committee in 1994. Chapter 4 defines the sustainability
committee from a broader aspect – sustainability committees are expected to explicitly
focus on (at least some if not all) sustainability issues in their agenda. Thus, it is
reasonable to argue that Australia provides a good research opportunity to examine the
effects of a sustainability committee, as such a committee has a long history in this
country.
As the previous chapter explains, more Australian firms consider disclosure, and
more disclosure is being released. This chapter explores how the firms’ experience of
sustainability disclosure is related to their sustainability performance. On one hand,
better transparency of corporate sustainability (sustainability disclosure) is perceived
to improve sustainability performance (Jin & Leslie, 2003, 2009), as the Brandeis’s
view suggests: “sunlight is said to be the best of disinfectants”.46 On the other hand,
as revealed by some studies about sustainability disclosure (Boxenbaum & Jonsson,
2008; Brennan et al., 2009; Deegan, 2002; Delmas & Toffel, 2011; Oliver, 1988, 1991,
1997), the disclosure could be decoupled from actual performance. If this is the case,
firms’ experience of sustainability disclosure is expected to not help them to improve
their sustainability performance. Interviewing business leaders, Adams (2017) found
that the experience of sustainability disclosure can help boards of directors to take into
account sustainability issues. Apparently, more empirical evidence can contribute to
this discussion. As sustainability disclosure is embraced by more Australian firms, this
chapter also would like to join this discussion by empirically examining this relation.
Motivated by the visibly increasing importance of corporate sustainability, this
chapter examines how the sustainability committee and firms’ disclosure experience
45 There are different names for this committee in annual reports, including “public policy committee,
sustainability committee, corporate social responsibility committee, environmental health and safety
committee, etc.” (Peters & Romi, 2015, p. 173). 46 Quotes are made by Louis Brandeis in his book, Other People's Money and How the Bankers Use
It, which is firstly published in 1914.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 117
are related to performance. Accordingly, two research questions are proposed (readers
may refer to Section 1.3.2 and Table 1-1):
RQ2: How is experience of sustainability disclosure related to sustainability
performance?
The firm’s experience of sustainability disclosure is operationalized by how
many years a firm has disclosed its corporate sustainability.
RQ3: How is the sustainability committee related to sustainability
performance? This is operationalized as:
a. How is the presence of a sustainability committee related to
sustainability performance?
b. How is the effectiveness of the sustainability committee related to
sustainability performance?
There are a number of studies about audit committee effectiveness that inspired
me regarding how to operationalize sustainability committee effectiveness.47 Chapter
4 included up to twelve committee characteristics that comprise four components of
sustainability committee effectiveness: (1) composition, (2) authority, (3) resources,
and (4) diligence. Unlike Zaman, Hudaib and Haniffa (2011) and Al‐Shaer and Zaman
(2018), I do not include committee size as an indicator of committee effectiveness, as
every committee characteristic is scaled by committee size in this chapter. In alignment
with DeZoort et al. (2002) who review studies about audit committee effectiveness, I
define an effective sustainability committee as one that consists of competent members
with the authority and resources to facilitate decisions made by the board and senior
management regarding corporate sustainability through diligent efforts and advice.
Analysing 2,166 firm-year observations from 2002 to 2016, this chapter reveals
a positive relationship between the firm’s experience of sustainability disclosure and
performance. In terms of the presence of a sustainability committee, Chapter 4 finds
that there is a positive relationship between the presence of a sustainability committee
and sustainability performance. Sampling 430 firm-year observations as to committee
47 Readers may refer to Turley and Zaman (2007), Zaman, Hudaib and Haniffa (2011), Aldamen,
Duncan, Kelly, Mcnamara and Nagel (2012), Bryce, Ali and Mather (2015), Sultana (2015),
Appuhami and Tashakor (2017), Al‐Shaer and Zaman (2018), Endrawes, Feng, Lu and Shan (2018),
and Shan, Troshani and Tarca (2019).
118 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
effectiveness, Chapter 4 finds a positive relationship between committee effectiveness
and a pillar of sustainability performance, namely environmental performance. Among
the four components of committee effectiveness, resources and authority are found to
exert influence on environmental performance. I performed robustness tests, including
endogeneity, performance measurements, sectoral environment and time stability.
This chapter explores two avenues for voluntary practices perceived to improve
sustainability performance: (1) firm’s experience of sustainability disclosure; and (2)
the presence and effectiveness of a sustainability committee. Extending Adams (2017),
Chapter 4 renders empirical evidence based on a set of panel data to suggest that firms
can benefit from engaging in sustainability disclosure by having better sustainability
performance. Distinct from prior studies48 about the committee, Chapter 4 emphasizes
sustainability performance, rather than other sustainability practices (e.g. assurance
services or disclosure). Moreover, firms in various sectors are sampled over 15 years
(2002 – 2016), rather than few sectors in a short period. Arguably, the research design
of Chapter 4 depicts a more comprehensive picture than previous studies, contributing
to the literature focusing on sustainability and corporate governance. In addition, rich
characteristics of sustainability committee (e.g., composition, authority, resources, and
diligence), are examined, rather than being limited to only the presence of committee.
The practical implications of this chapter are also worthy of discussion.
From a managerial perspective, as the awareness of sustainability is expected to
continue to rise and require further integrated decision-making (Carroll, 1991; Carroll
& Shabana, 2010; Schwartz & Carroll, 2003), voluntary disclosure and the presence
of a sustainability committee provide opportunities for firms to embrace this social
trend. Thus, this chapter directly appeals to boards who plan to introduce sustainability
into the firms that they serve by suggesting active engagement in disclosure and the
setup of a committee as two feasible methods of integration.
From the regulators’ perspective, Chapter 4 highlights voluntary practices that
strengthen sustainability performance. Under a pressure to follow regional trends, the
ASX may recommend the two avenues to its listed firms. Compared with mandatory
approaches (refer to Section 1.2), engagement in sustainability disclosure and setup of
48 See Peters and Romi (2014, 2015) as examples.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 119
sustainability committee provide more discretion to Australian firms in deciding how
to pursue corporate sustainability.
From investors’ perspective, as socially responsible investments in Australia saw
a rise (refer to Section 1.2), Chapter 4 investigates two avenues that can contribute to
better sustainability performance. Thus, investors interested in social responsibility or
sustainability may discuss the two avenues with directors and top management team.
From the broader perspective, Chapter 4 also aligns with Bowen (2014) who
highlights that symbolic action also has social costs, as resources used on symbolic
action could be switched to substantial action. As both the preparation of sustainability
disclosure information and establishing a sustainability committee are likely to have
costs to firms and to stakeholders, respectively, they are substantial actions that
generate benefits to the society. The remainder of Chapter 4 unfolds as follows: prior
studies are discussed in Section 4.2, and hypotheses are developed in Section 4.3. The
research design is explained in Section 4.4. Findings are presented in Section 4.5. This
chapter is concluded in Section 4.6.
4.2 LITERATURE REVIEW
In the Australian literature, interviewing business leaders in Australia and South
Africa, Adams (2017) found that sustainability reporting initiatives (i.e. the King III
Code and International Integrated Reporting Framework) help boards of directors
focus on issues regarding sustainability. Extending Adams (2017), Chapter 4 provides
quantitative evidence about the relationship between firms’ experience of disclosure
and performance. There are no studies directly relevant to RQ2, however some prior
research assists deriving it. Analysing environmental impact assessment, Hironaka and
Schofer (2002) suggest that use of environmental impact assessment in firms gradually
raised their awareness of environmental impact, and Chandler (2014), examining the
role of ethics and compliance officer position, find that although this officer position
was empty and symbolic at beginning, it gradually pushes senior management to pay
more attention to ethics as well as compliance issues over time. In sociology literature,
Edelman (1992) and Dobbin, Schrage, and Kalev (2009), analysing equal employment
opportunity/affirmative action practices in the US, confirm that an empty exercise or
a symbolic mechanism within a firm can transform into substantial practice over time.
120 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
RQ2 aligns with the previous studies by examining firms’ experience of sustainability
disclosure and their sustainability performance.
While the establishment of a sustainability committee is not a new phenomenon
in Australia, many research opportunities remain. In prior studies, Rankin et al. (2011)
examined how the sustainability committee is related to the disclosure of greenhouse
gas emissions and found that its existence is irrelevant to how Australian firms report
their greenhouse gas emissions. Prior literature in other countries approaches the
sustainability committee from different perspectives.
Sampling 219 firm-year observations between 2003 and 2008, Rodrigue et al.
(2013) examined three governance mechanisms as to environmental performance, one
of which was the sustainability committee. There is no significant relationship between
the three governance mechanisms and environmental performance. Analysing a group
of the US firms in 2004, Dixon-Fowler et al. (2017) identified that the presence of a
sustainability committee and a C-suite officer devoted to firms’ environmental issues
are positively related to environmental performance. Thus, the current literature seems
to be contradictory regarding how a sustainability committee relates to environmental
performance.
Moreover, few studies examine how the presence of a sustainability committee
is related to sustainability disclosure. Analysing US firms (2002 – 2010), Peters and
Romi (2015) examine corporate governance characteristics pertains to sustainability,
namely presence of a sustainability committee, the presence of C-suite officer devoted
to sustainability matters, the personal characteristics of committee members and the
personal expertise of this officer. According to a sample of 912 firm-year observations,
they found the presence of a sustainability C-suite officer and the personal expertise
of this C-suite officer are positively related to use of assurance services on disclosure.
While the presence of a sustainability committee is arguably not directly related, the
committee members’ personal characteristics do influence acquisition of assurance
services. A committee that consists of directors with sustainability expertise is likely
to employ assurance services provided by professional accounting firms.
Regarding how firms communicate greenhouse gas emissions, Peters and Romi
(2014), examining 1,238 firm-year observations in the US between 2002 and 2006,
find that the presence of a sustainability committee and of a C-suite officer devoted to
sustainability issues are positively related to disclosure of greenhouse gas emissions.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 121
Expertise of committee members and the person performing as C-suite officer affect
disclosure quality. Liao et al. (2015), analysing 329 firms in the UK from 2011, find
that presence of a sustainability committee influences whether firms participate in the
Carbon Disclosure Project, and other board characteristics (i.e. gender diversity and
board independence) affect the participation. Analysing 114 firms from ten countries
in 2003, Michelon and Parbonetti (2012) find governance characteristics, namely
board independence, CEO duality, presence of a sustainability C-suite officer and the
presence of a sustainability committee are not related to sustainability disclosure
(measured as number of sentences).
Chapter 4 contributes to this emerging field in multiple ways. First, this chapter
concentrates on the sustainability committee in Australia – an area that prior studies
do not explore. Secondly, it examines how the presence of a sustainability committee
relates to sustainability performance, a topic that is meaningful and practical. Thirdly,
extending on prior literature, Chapter 4 uses a more robust research design that is built
on a longer sample period, inclusion of more committee characteristics, inclusion of
firms in different industries and the use of different performance measurements. The
theoretical framework and hypotheses of this chapter are detailed in following section.
4.3 THEORETICAL FRAMEWORK AND HYPOTHESIS
This chapter develops three hypotheses, the first regarding disclosure experience
(H3), the second regarding the presence of a sustainability committee (H4a), and the
third regarding the sustainability committee effectiveness (H4b). Readers may refer to
Section 1.3.2 and Table 1-1 for the aforementioned three hypotheses. Development of
H3 is based on institutional theory.49 The underlying theoretical tenets of institutional
theory have been carefully discussed at Section 3.3. Participation in sustainability
disclosure tends to strengthen performance over time, even if disclosure was only an
empty exercise at the beginning (Scott, 2001). Tracking how EEO/AA50 mechanisms
function over time, Edelman (1992, p. 1544) finds “once EEO/AA structures are in
place, the personnel who work with or in those structures become prominent actors in
the compliance process: they give meaning to law as they construct definitions of
49 More information about institutional theory can found in Meyer (1992), Scott (2001) and
Boxenbaum and Jonsson (2008). 50 EEO/AA is abbreviation of equal employment opportunity/affirmative action in Edelman (1992).
122 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
compliance within their organizations”. Aligning with Edelman (1992), few studies,
including Hironaka and Schofer (2002), Dobbin, Schrage, and Kalev (2009), Tilcsik
(2010) and Chandler (2014), find that an empty exercise or a symbolic mechanism
within an organization can transform into substantial practice over time, as such an
exercise or mechanism educates persons within an organization and eventually alters
organizational behaviour from the inside out. Following prior literature, this chapter
conjectures that firms that have engaged in sustainability disclosure for longer duration
would deliver better performance, as experience of disclosure is to raise awareness of
sustainability practice within firms and equip decision makers with the knowledge
about how to practice sustainability, leading to better performance. Thus, H3 is
presented below:
H3 There is a positive relationship between a firm’s sustainability performance
and its experience of sustainability disclosure.
Regarding the H4a – how the presence of a sustainability committee is related to
sustainability performance, there are two theoretical arguments, namely greenwashing
and stewardship theory, which can be used to develop the H4a. In stewardship theory,
“pro-organizational, collectivistic behaviours have higher utility than individualistic,
self-serving behaviours” for steward (Davis, Schoorman & Donaldson, 1997, p. 24).
Such utility order can be due to a number of psychological and situational factors. For
example, to protect their reputations and future career opportunities, senior managers
and directors would operate their firms in a manner that maximizes firm value (Daily,
Dalton, & Cannella, 2003). In addition to the concern on personal reputation, there are
other factors, including identification (whether senior managers and directors identify
with their own firms), commitment (to what extent they are committed to their firms),
management philosophy, and cultural differences (Davis, Schoorman & Donaldson,
1997). Thus, stewardship theory (Daily, Dalton, & Cannella, 2003; Kiel & Nicholson,
2003; Nicholson & Kiel, 2007) posits that board committees are formed to facilitate
directors and management in monitoring and strategic decision-making (Hillman &
Dalziel, 2003), and directors provide good stewardship of the resources entrusted to
them (Kiel & Nicholson, 2003; Nicholson & Kiel, 2007). In the literature, Walls et al.
(2012), Peters and Romi (2014, 2015) and Dixon-Fowler et al. (2017) lend support to
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 123
stewardship theory by finding that sustainability committees can help boards to better
integrate sustainability with corporate governance.
From a view of greenwashing, sustainability committees represent “ceremonial
façade or artificial or false front that in the case of formal organizations is fashioned
to create a favourable impression” (Forbes & Jermier, 2011, p. 562). From the view of
sustainability disclosure, greenwashing is defined as an intersection of two activities,
(1) worse sustainability performance and (2) positive disclosure about sustainability
performance (Delmas & Burbano, 2011). It has been frequently used in the context of
sustainability disclosure, as Bowen (2014) elaborates that greenwashing designates to
a strategic information-disclosure decision initiated by firms to benefit firms yet cost
society. However, greenwashing can be used in a context of corporate governance for
sustainability (sustainability committees in this chapter), as Forbes and Jermier (2011,
p. 562) suggest that “greenwashing is a sophisticated form of symbolic management
…… greenwashing is a green ceremonial façade”. Nevertheless, greenwashing in the
context of corporate governance for sustainability relates to other theoretical aspects,
including compromise of institutional theory (Oliver, 1988, 1991, 1997), impression
management (Bansal & Clelland, 2004; Cho, Patten, & Roberts, 2014; Tata & Prasad,
2015), and decoupling (Boxenbaum & Jonsson, 2008). To make my thesis concise and
clear, I emphasize this theoretical argument, greenwashing in the context of corporate
governance for sustainability. In their studies, Forbes and Jermier (2011) and Rodrigue
et al. (2013) suggest that as a greenwashing mechanism, a sustainability committee is
formed to maintain legitimacy and improve reputation. The greenwashing argument
suggests that there is no relation between firms’ sustainability committee and their
sustainability performance. A non-directional hypothesis is proposed for the second
hypothesis:
H4a There is no relationship between the presence of a sustainability committee
and sustainability performance.
Regarding the H4b – how sustainability committee effectiveness is related to
sustainability performance, Chapter 4 finds its theoretical foundation in DeZoort et al.
(2002) who emphasize audit committee effectiveness and resource dependency theory
124 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
(Pfeffer & Salancik, 2003). The sustainability committee is deemed as a nexus between
a firm and its essential resources needed to improve sustainability performance (Kiel
& Nicholson, 2003; Nicholson & Kiel, 2007). In resource dependency theory, board
of directors and their committees are considered as providers of various resources to
firms. Arguably, they provide legitimacy to maintain the public image of firms,
expertise needed (expertise of corporate sustainability in my case), administering
advice, linking firms to stakeholders (including investors, creditors, labour union and
politicians), as well as aiding in important decision making processes (Hillman &
Dalziel, 2003). In order to function as providers of sustainability-related resources to
firms, sustainability committees need to be effective. The operationalization of
sustainability committee effectiveness considers the characteristics of those who
comprise the committee and how they are organized.
First, competent members are expected to exert positive influence on corporate
sustainability. In Australia, prior studies explore several director characteristics. For
instance, Gray and Nowland (2013) analyse qualifications and professional expertise,
Gray, Harymawan, and Nowland (2016) examine the directors’ political connection,
Bugeja, Fohn, and Matolcsy (2016) consider directors’ external board connection and
work experience, and Chapple, Gray, Nowland and Sadiq (2018), Gray and Nowland
(2018) and Nowland and Simon (2018) include the directors’ meeting attendance in
their analysis. These studies provided the foundation of the research design of this
chapter. Secondly, how committee members are organized together matters. Following
DeZoort et al. (2002), Krishnamoorthy, Wright, and Cohen (2002), Ng and Tan (2003)
and Rochmah Ika and Mohd Ghazali (2012) also argued that committee effectiveness
is about more than the committee members’ personal characteristics. It consists of four
components in Chapter 4, namely (1) composition, (2) authority, (3) resources and (4)
diligence. Thus, the four components (composition, resources, authority, and
diligence) also correspond to human capital and relational capital considered by
resource dependency theory. In resource dependency theory, the first term, human
capital, refers to expertise, experience, knowledge, and skills of those who sit on
sustainability committees; the second term, relational capital, refers to actual and
potential resources embedded within the social networks maintained by the members
of committees (Hillman & Dalziel, 2003).
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 125
Resource dependency theory reinforces the above discussion about committee
effectiveness. Based on this theory, I argue that directors’ characteristics decide how
directors exercise their power in relation to sustainability issues and how sustainability
committees on which they sit perform. Effective sustainability committees can provide
quality advice and counsel about sustainability, help firms to maintain legitimacy and
reputation of corporate sustainability, better work as channels of communication and
conduits of information between firms and stakeholders, as well as acquiring resources
from important elements outside firms. Thus, the H4b about the relationship between
sustainability committee effectiveness and sustainability performance is proposed:
H4b There is a positive relationship between sustainability committee
effectiveness and sustainability performance.
4.4 RESEARCH DESIGN
The sample period is from 2002 to 2016. Data about sustainability performance
were downloaded from the Thomson Reuters Asset4. Data in relation to experience of
sustainability disclosure were collected from firms’ reports and the Thomson Reuters
Asset4. Data about sustainability committees were collected from the Bloomberg, the
Thomson Reuters Asset4 and annual reports. Other data were directly downloaded
from Morningstar and Worldscope. Firms that are constituents of the ASX 20051 are
sampled in this chapter.
After synthesizing data and deleting missing data, there are two samples, the first
sample comprises 2,166 firm-year observations for H3 and for H4a, and the second
sample comprises 430 firm-year observations for H4b. As Beck et al. (2018) suggest,
the Global Industry Classification Standard is adopted to classify the sample firms.
Samples are comparable with those analysed in Nguyen et al. (2018) who also use the
Thomson Reuters Asset4.
Panel A of Table 4-1 presents the industrial distribution of the first sample, and
Panel B of Table 4-1 reports year distribution of the first sample. Panel C reports
51 ASX 200 represents about 82% of the market capitalization on the ASX. More details about ASX
200 can be found at https://au.spindices.com/indices/equity/sp-asx-200, and access date is 13 May
2019.
126 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
industrial distribution of the second sample, and year distribution of the second sample
is in Panel D. Panel E reports the sample reduction process. As Table 4-1 shows, there
are two interesting patterns of frequency as to sustainability committees in Australia:
(1) greater than a half of sample committees (58.26%) are formed by firms in three
industries, namely materials, energy and industrials; (2) the majority of committees in
sample (82.37%) are formed after 2008. In terms of the sample industry distribution,
the materials, energy, and industrials industries are expected to have more issues about
corporate sustainability (Cho & Patten, 2007; Eccles et al., 2014), and firms in these
industries are expected to be more interested in improving their sustainability
performance with various methods, including sustainability committee. I further
examine this in Section 4.5.7. Regarding the sample year distribution, after searching
news, legislations, and prior studies, I do not identify persuasive shock about
sustainability committee choice. I examine whether sample periods affect findings in
Section 4.5.8. Variables and the measurements are explained below.
Table 4-1 Sample Selection Regarding the first sample, Panel A presents the distribution by industry, and Panel B reports the
distribution by year. Regarding the second sample, Panel C presents the distribution by industry, and
Panel D reports the distribution by year. Panel E reports the sample reduction process.
Panel A Distribution of the First Sample Firms by Industry
Industrial Affiliation N Percent
Materials 519 23.96
Industrials 446 20.59
Financials 277 12.79 Energy 297 13.71
Consumer Discretionary 272 12.56
Consumer Staples 126 5.82
Health Care 108 4.99
Utilities 47 2.17
Information Technology 38 1.75
Telecommunication Services 36 1.66
Total 2166 100
Panel B Distribution of the First Sample Firms by Year
Year N Percent
2002 6 0.28
2003 9 0.42
2004 60 2.77 2005 69 3.19
2006 72 3.32
2007 78 3.60
2008 88 4.02
2009 175 8.08
2010 247 11.40
2011 254 11.73
2012 257 11.87
2013 240 11.08
2014 214 9.88
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 127
2015 206 9.51
2016 191 8.82
Total 2166 100
Panel C Distribution of the Second Sample Firms by Industry
Industrial Affiliation N Percent
Materials 180 41.86
Industrials 95 22.09
Energy 78 18.14
Financials 31 7.21
Consumer Staples 25 5.81
Consumer Discretionary 11 2.56
Health Care 5 1.16 Utilities 5 1.16
Information Technology 0 0
Telecommunication Services 0 0
Total 430 100
Panel D Distribution of the Second Sample Firms by Year
Year N Percent
2002 2 0.47
2003 5 1.16
2004 11 2.56
2005 14 3.26
2006 17 3.95
2007 24 5.58
2008 25 5.81 2009 35 8.14
2010 38 8.84
2011 43 10.00
2012 49 11.40
2013 49 11.40
2014 40 9.30
2015 41 9.53
2016 37 8.60
Total 430 100
Panel E Sample Reduction Process
Observations
Observations available in Thomson Reuters Asset4 (2002 – 2016) 2,639
LESS: missing data due to merging with Worldscope (151)
LESS: missing data due to merging with Morningstar (322) Firm-year observations for H3 and H4a 2,166
LESS: exclusion of sample firms without a sustainability committee (1,736)
Firm-year observations for H4b 430
4.4.1 Corporate Sustainability Performance (CSP)
As suggested by Malik (2015) and Dragomir (2018), there are different ways to
operationalize sustainability performance. For instance, Galbreath and Shum (2012)
measure sustainability performance firm by firm by hiring experts’ opinion, and Lee,
Faff, and Langfield-Smith (2009), Humphrey, Lee, and Shen (2012) and Beck et al.
(2018) adopt ESG ratings from (rating) agencies to operationalize such performance.
As instructed by various seminal studies, including Ioannou and Serafeim (2010),
Cheng et al. (2014), Eccles, Ioannou, and Serafeim (2014), Lys et al. (2015), Michelon,
Pilonato, and Ricceri (2015) and Liang and Renneboog (2017), this chapter measures
128 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
sustainability performance according to the ESG ratings assigned by the Thomson
Reuters Asset452 (i.e. Asset4). Asset4 has a multilevel structure in its assessment: at
the first level, there are more than 750 data points for firms in its universe; at the middle
level, these data points are synthesized into more than 250 performance indicators; and
at the very top level, performance indicators are synthesized into categories that are
composed of four pillars: namely (1) environmental score/ performance, (2) social
score/ performance, (3) corporate governance score/ performance and (4) economic
score/ performance. In the Australian literature, Asset4 Asset4 ESG ratings has been
used by Biswas et al. (2018), Nguyen et al. (2018) and Krishnamurti, Shams, and
Velayutham (2018) to operationalize Australian firms’ sustainability performance.
While I acknowledge that the Asset4 considers firms’ disclosure in measuring
how firms perform regarding sustainability performance, it includes other sources,
including news, stock exchange filings and NGOs’ information. Following the studies
of Ioannou and Serafeim (2010), Cheng et al. (2014), Eccles et al. (2014) and Nguyen
et al. (2018) that also use the ESG ratings/ scores of Asset4 to measure sustainability
performance, I measure firms’ sustainability performance by averaging environmental
score/performance and social score/performance (i.e. the mean of the first two pillars).
It is noteworthy that the third pillar, corporate governance performance/ score, is also
included as control. Regarding sub-categories, environmental performance/ score
consists of three sub-categories: (1) emission reduction, (2) product innovation, and
(3) resource reduction; social performance/ score has six sub-categories: (1) product
responsibility, (2) diversity and opportunity, (3) health and safety, (4) community, (5)
training and development, and (6) employment quality; and, corporate governance
performance/ score has five sub-categories: (1) board functions, (2) board structure,
(3) compensation policy, (4) vision and strategy, and (5) shareholder rights. Although
I do not use economic performance/ score in Chapter 3, I still introduce sub-categories
of economic performance/ score for a comprehensiveness purpose: (1) performance,
(2) shareholder loyalty, and (3) client loyalty. The earliest available data is from 2002,
and the latest data ceases in 2016. Readers may refer to Figure 3-1 and 3-2.
52 More information about the Thomson Reuters Asset4 can be found on
https://libguides.mit.edu/sustainablebusiness/asset4 and https://www.sri-
connect.com/index.php?option=com_comprofiler&Itemid=4&task=userProfile&user=1007283, and
access date is 24 January 2019.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 129
4.4.2 Corporate Sustainability Committee: Presence (SC) and Effectiveness
(SC_EFFE)
Regarding the presence of a sustainability committee(s) (SC), this chapter codes
the value of one for a firm-year observation if there is sustainability committee, and
zero otherwise. Synthesizing data from several sources, namely the Bloomberg, Asset4
and annual reports (collected from the Connect 4 and corporate websites), I found 430
firm-year observations of a sustainability committee. An example of a sustainability
committee is presented in the Appendix E.
Sustainability committees in the sample are standalone, rather than combined
with other committees. While sustainability committees theoretically can be combined
with other committees53, Australian firms seem to prefer a standalone committee. It is
interesting to note that some Australian firms established more than one sustainability
committee. For example, Crown Resorts Limited formed a committee on responsible
gaming and another on occupational health, safety and environment in 2011; the firm,
maintaining the two committees, formed the third committee focusing on corporate
social responsibility in 2014. In the samples, there are three firm-year observations of
three committees and 24 firm-year observations with two committees.
Following DeZoort et al. (2002) and Rochmah Ika and Mohd Ghazali (2012), I
operationalize sustainability committee effectiveness (SC_EFFE) in four components:
(1) composition, (2) authority, (3) resources and (4) diligence. Details regarding every
component are explained below. In order to collect relevant data, I read the biography
of each committee member disclosed in annual reports and other external sources (e.g.
Bloomberg, Factiva and Google) to collect as much information as possible for data
analysis. An example of the collection is shown in Appendix E. This manual collection
process took seven months to complete.
(1) Composition
Composition consists of the percentage of independent directors and percentage
of directors with expertise regarding sustainability (Peters & Romi, 2014, 2015). In
order to determine expertise, this chapter follows Peters and Romi (2014, 2015): I read
53 Following the Corporate Governance Principles and Recommendations published by the Australian
Securities Exchange in 2010, 2014 and 2019, it is feasible to set up a board committee combining risk
management with sustainability. However, I do not find such practice in the second and third samples.
Future studies are encouraged to explore why this is the case.
130 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
the biography of each member for evidence about current or previous employment in
organizations about sustainability; positions as academics or scientists with research
in, or work relating to, sustainability-related disciplines; or with prior experience in
sustainability executive positions. This chapter uses the biographies provided in annual
reports, as well as those provided by other external sources, and labels a committee
member as sustainability expert if her/his profile matches criteria above.
(2) Authority
Committee authority includes two indicators, namely average board tenure and
average committee tenure of the committee members (Peters & Romi, 2015). Members
with a longer tenure are expected to hold more authority.
(3) Resources
Committee resources include the resources that are available to that committee.
Committee members’ personal characteristics, namely social connections, gender and
higher education qualifications, capture some of the resources that the committee can
rely upon (Gray & Nowland, 2013; Bugeja, Fohn & Matolcsy, 2016). It is argued that
overlap between the sustainability committee and the audit committee and overlap
between sustainability committee and risk management committee in membership
facilitates information flows in and out of the sustainability committee and coordinates
different board committees in integrating sustainability with corporate governance; in
this instance the overlap itself also is a resource.
(4) Diligence
Regarding committee diligence, it is essential for a sustainability committee to
diligently exercise its authority and use resources to contribute to better performance.
In Chapter 4, diligence consists of three indicators, namely meeting frequency (Zaman,
Hudaib & Haniffa, 2011; Al‐Shaer & Zaman, 2018), attendance (Chapple, et al., 2018;
Gray & Nowland, 2018; Nowland & Simon, 2018) and shareholding of committee
members.
I use a scoring system to calculate an overall score for committee effectiveness
(SC_EFFE). With respect to the committee composition, percentage of independent
directors and sustainability expert directors are summed to get a score of composition.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 131
Regarding committee authority, board tenure and committee tenure have been
standardized by deducting a sample mean and then divided by the standard deviation
of the sample. Their z-scores are summed to calculate a score of the authority.
In terms of committee resources, the number of social connections per member
and the number of higher education qualifications per member are standardized by
deducting a sample mean and then divided by the standard deviation of the sample.
Their z-scores, percentage of female members and percentage of members sitting on
additional two committees (i.e. audit committee or risk management committee) are
summed to get a score of resources.
Regarding committee diligence, frequency of meetings and shareholding of
members are standardized by deducting a sample mean and divided by the standard
deviation of the sample. Meeting attendance and their z-scores are summed to calculate
a score of diligence. Finally, the scores of four components, composition, authority,
resources and diligence, are summed to calculate an overall score of sustainability
committee effectiveness (SC_EFFE).
There are three caveats to readers. First, data of the presence of a sustainability
committee (SC) from 2002 to 2016 were synthesized from three sources, namely the
Bloomberg, the Asset4 and annual reports. Thus, these data are expected to be more
reliable than if data were obtained from any single source. Secondly, raw data about
committee effectiveness (SC_EFFE) were manually collected. This manual approach
is consistent with prior literature about director characteristics in Australia, including
Bugeja et al. (2016) and Gray et al. (2016). As no database provides comprehensive
data about sustainability committee members in Australia54, I manually collected the
relevant data. Thirdly, the scoring system of sustainability committee effectiveness
(SC_EFFE) equally weights each characteristic, as there is no persuasive method to
determine which characteristics are more important.
4.4.3 Experience of Sustainability Disclosure (YEAR_REPORT)
Regarding the experience of sustainability disclosure (YEAR_REPORT), this
chapter uses the firms’ number of years experience regarding disclosure to reflect
54 Databases, including SIRCA and Connect4, provide too brief information about directors to be
useful in Chapter 4.
132 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
disclosure experience. Following Hironaka and Schofer (2002), Dobbin et al. (2009),
Tilcsik (2010) and Chandler (2014), firms with more years’ experience of utilising
sustainability disclosure acquire more experience of disclosure. Control variables are
discussed in following section.
4.4.4 Control Variables
Regarding control variables on sustainability performance, I control newness of
property, plant and equipment (NEW), firm size (SIZE), leverage (LEV), shareholding
concentration (SHARECON), market-to-book ratio (MTB), return on assets (ROA),
corporate governance performance (CG)55, existence of a risk management committee
(RMC) and capital expenditure (CAPEXP). Year and industries are controlled. Adams
(2004), Al-Tuwaijri et al. (2004), Clarkson et al. (2008), Clarkson et al. (2011), Delmas
and Toffel (2011), Malik (2015), Dienes et al. (2016), Khan et al. (2016) and Jain and
Jamali (2016) provide authority that the aforementioned variables ought to be
controlled. Larger firms are perceived to do better regarding sustainability (Gallo &
Christensen, 2011). Firms with high leverage or incurring more capital expenditure
may invest less on corporate sustainability, as resources on hand are restricted (Arora
& Dharwadkar, 2011). Those with high market-to-book ratio may invest less in
sustainability, as they have more profitable projects awaiting investment. Firms with
the latest property, plant and equipment can deliver better performance (Clarkson et
al., 2008). As suggested by Rankin et al. (2011) and Jain and Jamali (2016), two
governance variables are used as controls: namely CG and RMC. The details about
variables and their measurements are tabulated below.
55 Refer to Figure 3-1 and 3-2.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance 133
Table 4-2 Variables and Their Measurements Variable Abbr. Measurement Source(s)
Dependent Variables
Corporate Environmental
Performance
ENV Environmental scores assigned by the Thomson Reuters Asset4 Ioannou and Serafeim (2010), Cheng
et al. (2014) and Eccles et al. (2014)
Corporate Social Performance SOC Social scores assigned by the Thomson Reuters Asset4 Ioannou and Serafeim (2010), Cheng
et al. (2014) and Eccles et al. (2014)
Corporate Sustainability
Performance
CSP Mean of environmental scores and social scores assigned by the Thomson
Reuters Asset4
Ioannou and Serafeim (2010), Cheng
et al. (2014) and Eccles et al. (2014)
Independent Variables
Board Tenure of Committee
Members
BOARD_TEN Average years of committee members serving on the board – this variable
is standardized by deducting a sample mean and then divided by the
standard deviation of the sample in the scoring system.
Rochmah Ika and Mohd Ghazali
(2012)
Committee Tenure of Committee
Members
SC_TEN Average years of committee members serving on the committee – this
variable is standardized by deducting the sample mean and then divided
by the standard deviation of the sample in the scoring system.
Rochmah Ika and Mohd Ghazali
(2012) and Sultana (2015)
Higher Education Qualification SC_EDUCATION Average number of higher education qualifications held by the committee
members – this variable is standardized by deducting the sample mean and
then divided by the standard deviation of the sample in the scoring system.
Aldamen, et al. (2012) and Rochmah
Ika and Mohd Ghazali (2012)
Experts on Committee SC_EXP Percentage of members classified as sustainability experts Zaman, Hudaib and Haniffa (2011),
Aldamen, et al. (2012), Rochmah Ika
and Mohd Ghazali (2012), Sultana
(2015), Bryce, Ali and Mather (2015),
Appuhami and Tashakor (2017), Al‐Shaer and Zaman (2018) and
Endrawes, et al. (2018)
Experience of Sustainability
Disclosure
YEAR_REPORT Number of years that a firm has released its sustainability disclosure Edelman (1992)
Gender SC_GENDER Percentage of committee members who are women Rochmah Ika and Mohd Ghazali
(2012) and Appuhami and Tashakor
(2017)
Independence of Committee
Members
SC_INDEP Percentage of independent directors on committee DeZoort et al. (2002), Zaman, Hudaib
and Haniffa (2011), Aldamen, et al.
(2012), Rochmah Ika and Mohd
134Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
Variable Abbr. Measurement Source(s)
Ghazali (2012), Sultana (2015),
Appuhami and Tashakor (2017) and
Al‐Shaer and Zaman (2018)
Meeting Attendance SC_ATTEND Average percentage of meetings attended by committee members Rochmah Ika and Mohd Ghazali
(2012), Chapple, et al. (2018), Gray
and Nowland (2018) and Nowland and
Simon (2018)
Meeting Frequency SC_MEET Number of meetings held by the sustainability committee – this variable is
standardized by deducting the sample mean and then divided by the
standard deviation of the sample in the scoring system.
Zaman, Hudaib and Haniffa (2011),
Aldamen, et al. (2012), Rochmah Ika
and Mohd Ghazali (2012), Sultana (2015), Bryce, Ali and Mather (2015),
Appuhami and Tashakor (2017) and
Al‐Shaer and Zaman (2018)
Number of Sustainability
Committee
SC_NO Number of sustainability committees that a firm has in a year
Overlapping of Sustainability
Committee and Audit Committee
SC_AC Percentage of committee members serving on audit committee DeZoort et al. (2002) and Rochmah
Ika and Mohd Ghazali (2012)
Overlapping of Sustainability
Committee and Risk
Management Committee
SC_RMC Percentage of committee members serving on risk management committee DeZoort et al. (2002) and Rochmah
Ika and Mohd Ghazali (2012)
Presence of Sustainability Committee
SC A firm-year observation is coded one, if there is sustainability committee, and zero otherwise.
Shareholding of Committee
Members
SC_SHARE Average percentage of ordinary shares held by the committee members –
this variable is standardized by deducting the sample mean and then
divided by the standard deviation of the sample in the scoring system.
DeZoort et al. (2002) and Rochmah
Ika and Mohd Ghazali (2012)
Social Relations SC_RELATION Average number of social connections (e.g. directorship in other firms,
leadership in non-governmental organizations, and professorship in
universities disclosed in annual reports) held by committee members – this
variable is standardized by deducting the sample mean and then divided
by the standard deviation of the sample in the scoring system.
Gray, Harymawan, and Nowland
(2016) and Bugeja, Fohn, and
Matolcsy (2016)
Sustainability Committee Effectiveness
SC_EFFE Overall score of sustainability committee effectiveness based on four components, namely composition, authority, resources and diligence
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance 135
Variable Abbr. Measurement Source(s)
Control Variables
Capital Expenditure CAPEXP Capital Expenditure
Total Assets
Clarkson et al. (2008) and Clarkson et
al. (2011)
Corporate Governance
Performance
CG Corporate governance scores assigned by the Thomson Reuters Asset4 Rankin et al. (2011)
Firm Size SIZE Ln Market Capitalization Clarkson et al. (2008) and Clarkson et
al. (2011)
Leverage LEV Total Liabilities
Total Assets
Dienes et al. (2016)
Market-to-book Ratio MTB Market Capitalization
Book Value
Dienes et al. (2016)
Newness of Property, Plant and
Equipment
NEW Net Property, Plant and Equipment
Gross Property, Plant and Equipmen
Al-Tuwaijri et al. (2004) and Clarkson
et al. (2008)
Return on Assets ROA Reported Net Profit After Tax
Total Assets
Al-Tuwaijri et al. (2004) and Clarkson
et al. (2008)
Risk Management Committee RMC Presence of a risk management committee Jain and Jamali (2016)
Shareholding Concentration SHARECON Percentage of ordinary shares owned by Top 20 shareholders Dienes et al. (2016)
136 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
4.4.5 Econometric Models
This chapter uses two equations to test three hypotheses. The first equation
estimates the effects of firms’ experience of sustainability disclosure (H3) and the
presence of a sustainability committee (H4a) on firms’ sustainability performance. It
corresponds to 2,166 firm-year observations between 2002 and 2016. The second
equation tests the relationship between sustainability committee effectiveness and
performance (H4b). It corresponds to 430 firm-year observations from 2002 to 2016.
Chapter 4 uses panel regression with robust standard errors. Time and industry fixed
effects are controlled. Regarding endogeneity, as instructed by Nguyen et al. (2018), I
use propensity score matching (PSM) and dynamic generalized method-of-moments
(GMM) to re-test H3 and H4a. As suggested by Kennedy (2008), Schultz et al. (2010),
Gippel et al. (2015), Wintoki et al. (2012) and Antonakis et al. (2010), endogeneity
can be due to several reasons, including omitted variables, omitted selection and
simultaneity. Consulting prior literature as to sustainability and using fixed effects, it
is reasonable to suggest that omitted variables do not cause endogeneity, as key control
variables are included, and fixed effects also are considered. Moreover, a focus on the
unexpected component of sustainability performance also minimizes effects of omitted
variables. Use of PSM and dynamic GMM can further minimize the effects of omitted
selection and simultaneity.
Several additional tests are performed. Several ways to measure sustainability
performance are used. Following Cho and Patten (2007) and Eccles et al. (2014), how
sectoral environment influences findings regarding H3, H4a and H4b are examined.
As the samples include 15 years (2002 – 2016), it is interesting to analyse whether
findings regarding H3, H4a and H4b are stable over time. This chapter takes the first
five years (2002 – 2006) and the last five years (2012 – 2016) to test whether the
findings are robust over time. Findings are detailed in following sections, and two
equations are presented below:
(1) 𝐶𝑆𝑃𝑖,𝑡 = 𝑏0 + 𝑏1𝑆𝐶𝑖,𝑡 + 𝑏2𝑌𝐸𝐴𝑅_𝑅𝐸𝑃𝑂𝑅𝑇𝑖,𝑡 + 𝑏3𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑏4𝑅𝑂𝐴𝑖,𝑡 + 𝑏5𝑀𝑇𝐵𝑖,𝑡 +
𝑏6𝑁𝐸𝑊𝑖,𝑡 + 𝑏7𝐿𝐸𝑉𝑖,𝑡 + 𝑏8𝐶𝐴𝑃𝐸𝑋𝑃𝑖,𝑡 + 𝑏9𝐶𝐺𝑖,𝑡 + 𝑏10𝑆𝐻𝐴𝑅𝐸𝐶𝑂𝑁𝑖,𝑡 + 𝑏11𝑅𝑀𝐶𝑖,𝑡 +
𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡
(2) 𝐶𝑆𝑃𝑖,𝑡 = 𝑏0 + 𝑏1𝑆𝐶_𝐸𝐹𝐹𝐸𝑖,𝑡 + 𝑏2𝑌𝐸𝐴𝑅_𝑅𝐸𝑃𝑂𝑅𝑇𝑖,𝑡 + 𝑏3𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑏4𝑅𝑂𝐴𝑖,𝑡 +
𝑏5𝑀𝑇𝐵𝑖,𝑡 + 𝑏6𝑁𝐸𝑊𝑖,𝑡 + 𝑏7𝐿𝐸𝑉𝑖,𝑡 + 𝑏8𝐶𝐴𝑃𝐸𝑋𝑃𝑖,𝑡 + 𝑏9𝐶𝐺𝑖,𝑡 + 𝑏10𝑆𝐻𝐴𝑅𝐸𝐶𝑂𝑁𝑖,𝑡 +
𝑏11𝑅𝑀𝐶𝑖,𝑡 + 𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 137
4.5 RESULTS
4.5.1 Descriptive Statistics
Descriptive statistics are presented in Table 4-3. The first sample (with 2,166
firm-year observations) is presented in Panel A of Table 4-3. Clearly, there is much
variance in sustainability performance with minimum score at 0 and maximum score
at 97.89. Firms in the first sample have a maximum of three sustainability committees.
On average, sample firms have four years’ experience of disclosure. Compared with
the sample analysed in Rankin et al. (2011), firms in the first sample are smaller in
firm size, have higher leverage ratio and report lower return on assets. As presented in
Panel B of Table 4-3, about half of the firms in the first sample have a risk management
committee, and one fifth have a sustainability committee. The percentage of firms with
a sustainability committee in the first sample is comparable to the percentage of firms
with an environmental committee (18.7%) in Rankin et al. (2011).
The second sample of 430 firm-year observations regarding the sustainability
committees is presented in Panel C of Table 4-3. Regarding committee composition,
84% of committee members are reported as independent, and 11% are sustainability
experts. Regarding committee authority, average board tenure is 5.94 years, and an
average committee tenure is 3.59 years. Regarding resources, 17% of them are women,
49% sit on an audit committee, and 34% sit on a risk management committee. 56 On
average, sustainability committee members hold 2.38 higher education qualifications
and 2.92 positions in other organizations or firms. Compared with directors analysed
in Gray and Nowland (2013), sustainability committee members in this chapter hold
comparable number of higher education qualifications and are more active (i.e. they
sit on more other organizations). A committee consists of 4.12 directors. Regarding
diligence, a committee holds 3.6 meetings per year, average attendance rate is 96%,
and members in a committee hold 0.3% of ordinary shares. It is reasonable to argue
that sustainability committees in the second sample are comparable with committees
analysed in other studies, including Rodrigue et al. (2013), Peters and Romi (2014,
2015) and Dixon-Fowler et al. (2017). It is noteworthy prior studies do not include as
56 It is noteworthy that audit committees are compulsory to listed firms in Australia, and risk
management committees are strongly encouraged for listed firms in Australia.
138 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
many characteristics of a sustainability committee as this chapter does. Correlation of
variables is presented in Table 4-4. It is interesting to notice that firms’ sustainability
performance is positively related to the presence of a sustainability committee and
effectiveness of a sustainability committee.
Table 4-3 Descriptive Statistics Panel A presents descriptive statistics about important variables. Panel B presents the number of risk management committees and the number of sustainability committees. It is noteworthy that
audit committee is compulsory to public firms in Australia. Panel C presents the characteristics of
the sustainability committee that are used to calculate scores about committee effectiveness.
Variables in this table are defined in Table 4-2.
Panel A Dependent and
Independent Variables
N MEAN STD.DEV MIN MAX
CSP 2166 39.03 26.28 0 97.885
ENV 2166 37.51 28.15 0 97.22
SOC 2166 39.99 28.13 0 98.89
SC_NO 2166 0.21 0.42 0 3
YEAR_ REPORT 2166 4.02 3.21 0.00 14
ROA 2166 0.02 0.21 -1.69 2.54
LEV 2166 0.45 0.24 0.004 1.32 MTB 2166 2.12 2.91 -28.43 38.11
Market Capitalization (in Billions) 2166 4.30 0.03 4.22 4.38
CG 2166 61.82 26.65 0.00 97.51
NEW 2166 0.63 0.23 0.00 1.00
CAPEXP 2166 0.08 0.11 0.00 1.00
SHARECON 2166 62.83 24.04 0.00 97.39
Panel B Frequency TOTAL PERCENTAGE
SC 430 19.85
RMC 1115 51.48
Panel C Characteristics of
Sustainability Committee
N MEAN STD.DEV MIN MAX
SC_INDEP 430 0.84 0.20 0 1
SC_EXP 430 0.11 0.20 0 1
BOARD_TEN 430 5.94 2.49 0 20.67
SC_TEN 430 3.59 1.76 0 8.75
SC_AC 430 0.49 0.26 0 1 SC_RMC 430 0.34 0.32 0 1
SC_GENDER 430 0.17 0.18 0 1
SC_RELATION 430 2.92 1.38 0 6.75
SC_EDUCATION 430 2.38 0.78 0 6
SC_MEET 430 3.60 1.32 0 10
SC_ATTEND 430 0.96 0.10 0 1
SC_SHARE 430 0.003 0.02 0 0.15
Size of Sustainability Committee 430 4.12 1.45 1 10
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance 139
Table 4-4 Correlation Matrix of Variables A correlation matrix of variables is presented in this table. The variables tabulated below are described in Panel A of Table 4-3. Variables in Panel B of Table 4-3 are not
included, as they are dummy variables. Variables in this table are defined in Table 4-2. Variable CSP SC_NO SC_EFFE SIZE LEV ROA MTB NEW CAPEXP CG SHARECON YEAR_REPORT
CSP 1 SC_NO 0.345*** 1 SC_EFFE 0.380*** -0.139*** 1 SIZE 0.549*** 0.0173*** 0.271*** 1 LEV -0.012 -0.010 0.195*** -0.053*** 1 ROA 0.024 -0.034* 0.037 -0.184*** -0.019 1 MTB 0.013 -0.032 0.030 -0.231*** -0.002 0.9895*** 1 NEW -0.124*** -0.022 -0.077 -0.029 -0.128*** 0.086*** 0.088*** 1
CAPEXP -0.010 -0.037* -0.158*** -0.251*** -0.001 0.981*** 0.991*** 0.117*** 1 CG 0.555*** 0.287*** 0.221*** 0.363*** -0.009 0.019 0.009 -0.109*** -0.001 1 SHARECON 0.020 0.088*** -0.047 0.021 -0.087*** -0.019 -0.024 -0.141*** -0.022 0.044** 1 YEAR_REPORT 0.483*** 0.122*** 0.711 *** 0.289*** 0.014 0.039** 0.044** -0.202*** 0.018 0.355*** 0.077*** 1
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
140 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
4.5.2 Experience of Sustainability Disclosure, the Presence of a Sustainability
Committee and Sustainability Performance – Equation (1) – H3 and H4a
Findings regarding H3 and H4a are shown in Table 4-5. As the number of years’
experience (YEAR_REPORT) is positively and significantly related to sustainability
performance (CSP), H3 is not rejected. Following Section 3.5.5 that uses Fisher-type
Augmented Dickey-Fuller Test to perform unit root test, I also used this test to check
stationarity of CSP data. At significance level of 1%, I rejected the null hypothesis that
CSP data is non-stationary. Thus, findings about H3 is not influenced by co-integration
issue, and sample firms with a longer duration of disclosure deliver better performance.
While H4a is about the presence of a sustainability committee, where a firm has
more than one sustainability committee, I substitute the presence of a sustainability
committee with the number of sustainability committees to provide more evidence
about this hypothesis. How the presence of a sustainability committee and the number
of sustainability committees are related to sustainability performance, respectively, are
shown in the first two columns of Table 4-5. The presence of a committee is
significantly related to sustainability performance, β = 9.928 (p<0.01), and the number
of committees is also significantly related to performance, β = 9.836 (p<0.01).
How the presence of this committee is related to environmental performance and
to social performance, respectively, is shown in the second two columns of Table 4-5.
The presence of a sustainability committee is significantly related to environmental
performance, β = 10.461 (p<0.01), and social performance, β = 9.097 (p<0.01). Thus,
H4a is rejected. Apparently, the effect of presence of a sustainability committee and
number of sustainability committees on firms’ sustainability performance is strong.
Regarding controls, firm size (Serafeim, 2013) and firms’ corporate governance
performance (Walls et al., 2012) are positively related to sustainability performance.
Leverage is negatively related to firms’ sustainability performance. Firms with higher
leverage hold less slack, restricting their investment in corporate sustainability (Arora
& Dharwadkar, 2011). Findings therefore support institutional theory and stewardship
theory. In terms of H3, Chapter 4 finds firms with more experience of sustainability
disclosure deliver better performance. Regarding H4a, this chapter reveals that the
presence of a sustainability committee can improve sustainability performance. The
aforementioned findings are consistent with prior literature in the US, including Walls
et al. (2012) and Dixon-Fowler et al. (2017).
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 141
Table 4-5 Experience of Sustainability Disclosure, the Presence of a Sustainability
Committee and Sustainability Performance – H3 and H4a This table presents the results of analysis of the relationship between experience of sustainability disclosure and sustainability performance and relationship between the presence of a sustainability
committee and such performance. The first two columns indicate the presence of a sustainability
committee and the number of such committees, respectively. The second two columns show
environmental performance and social performance, respectively. Variables in this table are described
in Table 4-2. In terms of model fit, the Equation (1) arguably is fit – it is based on prior studies, and
the proportion of variance is comparable with proportion of variance explained by prior studies.
(1) (2) (3) (4)
DV: CSP DV: CSP DV: ENV DV: SOC
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
SC 9.928
(3.68)***
- 10.461
(3.55)***
9.097
(3.02)***
SC_NO -
9.836
(3.89)***
- -
YEAR_REPORT 3.773
(7.03)***
3.795
(7.09)***
4.317
(6.82)***
3.296
(5.56)***
SIZE 2.493
(3.71)***
2.457
(3.66)***
2.441
(3.08)***
2.313
(2.98)***
LEV -4.837
(-1.72)*
-4.864
(-1.73)*
-3.211
(-0.95)
-6.313
(-2.09)**
ROA -0.017
(-1.13)
-0.017
(-1.11)
0.031
(1.77)*
0.005
(0.29)
MTB 0.036
(1.65)
0.036
(1.67)*
0.022
(0.91)
0.041
(1.61)
NEW -0.779 (-0.50)
-0.797 (-0.51)
-1.106 (-0.64)
-0.365 (-0.23)
RMC 1.565
(1.60)
1.570
(1.60)
1.849
(1.55)
1.720
(1.62)
CAPEXP -0.012
(-0.63)
-0.013
(-0.66)
0.004
(0.21)
-0.018
(-0.83)
CG 0.229
(7.74)***
0.226
(7.60)***
0.189
(5.49)***
0.273
(7.93)***
SHARECON 0.013
(0.41)
0.012
(0.38)
0.008
(0.23)
0.005
(0.12)
CONS -38.285
(-3.99)***
-38.104
(-3.99)***
-32.428
(-3.10)***
-32.178
(-2.81)***
Firm FE YES YES YES YES Year FE YES YES YES YES
Industry FE YES YES YES YES
Observations 2166 2166 2166 2166
Adjusted R-
square
0.63 0.62 0.57 0.55
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
142 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
4.5.3 Relationship between Sustainability Committee Effectiveness and
Sustainability Performance – Equation (2) – H4b
Findings regarding H4b are shown in Table 4-6. How sustainability committee
effectiveness as a whole is related to sustainability performance, environmental
performance and social performance is presented in the first three columns. As
presented in Table 4-6, sustainability committee effectiveness is positively related to
environmental performance, β = 1.499 (p<0.05), and effect of sustainability committee
effectiveness on firms’ environmental performance is also economically significant.
Thus, H4b is partially rejected, that is sustainability committee effectiveness is not
associated with sustainability performance as a whole. Additionally, how the four
components of sustainability committee effectiveness, namely composition, authority,
resources and diligence, are related to performance is presented in the second three
columns. As presented in Table 4-6, resources are positively related to environmental
performance, β = 3.177 (p<0.01), and authority is positively related to environmental
performance, β =1.829 (p<0.10). These two components of committee effectiveness
are economically significant. The control variables also behave as expected.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance 143
Table 4-6 Sustainability Committee Effectiveness and Sustainability Performance – H4b This table presents the results of the analysis of the relationship between sustainability committee effectiveness and sustainability performance. The first three columns show
relationships between committee effectiveness and sustainability performance, environmental performance and social performance, respectively. The second three columns
show relationships between the four components of effectiveness and three types of performance. Variables in this table are described in Table 4-2. In terms of model fit, the
Equation (2) arguably is fit – it is based on prior studies, and the proportion of variance is comparable with proportion of variance explained by prior studies. (1) (2) (3) (4) (5) (6)
DV: CSP DV: ENV DV: SOC DV: CSP DV: ENV DV: SOC
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
SC_EFFE 0.599
(1.18)
1.499
(2.04)**
-0.052
(-0.96)
- - -
Composition - - - -13.941
(-1.39)
-16.577
(-1.36)
-11.305
(-1.23)
Authority - - - 0.392 (0.36)
1.829 (1.93)*
-1.045 (-0.82)
Resources - - - 1.703
(1.52)
3.177
(2.68)***
0.229
(0.18)
Diligence - - - 1.437
(0.73)
-0.472
(-0.19)
3.346
(1.42)
YEAR_REPORT 3.762
(2.83)***
5.848
(3.45)***
0.505
(3.10)***
2.723
(1.47)
4.844
(2.10)***
0.602
(0.38)
SIZE 2.293
(0.21)
-0.575
(-0.40)
-0.100
(-0.82)
0.649
(0.47)
0.220
(0.17)
1.518
(0.72)
LEV -11.564
(-2.37)**
-16.083
(-2.96)***
0.027
(0.06)
-12.369
(-2.32)**
-18.213
(-3.11)***
6.525
(0.98) ROA 0.034
(0.63)
0.051
(0.75)
0.006
(1.26)
0.036
(0.67)
0.062
(0.94)
0.010
(0.17)
MTB 0.038
(0.38)
-0.041
(-0.57)
0.002
(0.45)
0.045
(0.48)
0.031
(0.41)
0.121
(1.01)
NEW -8.580
(-0.98)
-19.804
(-1.81)*
0.553
(0.94)
-11.478
(-1.26)
-22.405
(-1.92)*
-0.552
(-0.05)
RMC 1.281
(0.70)
3.148
(1.30)
-0.076
(-0.58)
1.063
(0.64)
2.883
(1.37)
-0.756
(-0.48)
CAPEXP 0.060
(0.50)
0.017
(0.11)
-0.001
(-0.05)
0.064
(0.56)
0.051
(0.34)
0.077
(0.65)
144Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
CG 0.327
(5.42)***
0.278
(3.61)***
0.010
(2.19)**
0.350
(5.35)***
0.310
(3.86)***
0.390
(6.01)***
SHARECON 0.236
(2.48)**
0.248
(1.94)*
0.010
(1.82)*
0.228
(2.64)**
0.231
(1.87)*
0.225
(2.85)***
CONS -19.705
(-0.82)***
-38.236
(-1.47)
-2.234
(-0.85)
-6.601
(-0.21)***
-19.020
(-0.55)***
5.819
(0.16)
Firm FE YES YES YES YES YES YES
Year FE YES YES YES YES YES YES
Industry FE YES YES YES YES YES YES
Observations 430 430 430 430 430 430
Adjusted R-square 0.16 0.43 0.10 0.36 0.35 0.24
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 145
Findings of H4b support committee effectiveness as discussed by DeZoort et al.
(2002) and the resources dependency theory. On one side, the sustainability committee
effectiveness and its two components (i.e., resources and authority) are significantly
related to environmental performance, reinforcing the argument that who sits on the
sustainability committee, and how they are grouped as a whole matter. On the other
side, sustainability committee effectiveness is not related to social performance. Social
performance includes customer and product responsibility, community, human rights,
diversity and opportunity, health and safety, employment quality, as well as training
and development (refer to Appendix 1). Thus, a speculation about this insignificant
relationship between the sustainability committee effectiveness and social
performance is that social issues are managed by the firms’ other departments,
mechanisms, or structures, rather than their sustainability committees. For example, in
relation to workers’ training and development and , labour relations, managers and
boards of directors may choose to supervise relevant these issues through other
mechanisms (e.g., risk management committee). Future studies are encouraged to
analyse if not by sustainability committee, which corporate governance mechanisms
are used to supervise social issues, and why social issues seem to be marginalized on
the agenda of the sustainability committee.
Arguably, this chapter extends on the studies of Gray et al. (2016) and Nowland
and Simon (2018) who examine director characteristics in Australia from board level
to committee level. Extending Rankin et al. (2011), Rodrigue et al. (2013), and Dixon-
Fowler et al. (2017) who investigate the presence of sustainability committee, Chapter
4 analyses a relatively novel direction, namely sustainability committee effectiveness.
Different from Peters and Romi (2015) who identify that composition of sustainability
committee (i.e., experts on committee) is related to use of assurance on sustainability
disclosure, I reveal that committee authority and resources are related to environmental
performance. In the following sections, Chapter 4 conducts robustness tests as
instructed by prior studies.
4.5.4 Robustness Test One – Endogeneity in H3 and H4a – PSM
Following Antonakis et al. (2010), Mishra (2014), Michelon et al. (2015) and
Nguyen et al. (2018), this chapter adopts PSM method to address omitted selection in
testing H3 and H4a. Two hypotheses are re-examined by matched-sample design. With
regard to H3, sample firms are grouped according to their experience of sustainability
146 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
disclosure (YEAR_REPORT). We code the value of one, if a firm-year observation’s
YEAR_REPORT is greater than the median of the full sample, and zero otherwise. A
propensity score is calculated from the first-stage model to predict whether a firm’s
YEAR_REPORT is above the median. The prediction model has all control variables
of Equation (1). Each firm-year observation whose YEAR_REPORT above median is
matched with another observation whose YEAR_REPORT is not. It is noteworthy that
this PSM analysis is based on 2,166 firm-year observations. Findings from this PSM
analysis are tabulated in Table 4-7. Panel A of Table 4-7 presents that the matching
procedure is valid, as all matched variables are statistically indistinguishable. Panel B
of Table 4-7 presents after using the PSM analysis to address for potential endogeneity,
YEAR_REPORT still is found to be positively related to CSP, β = 3.864 (p<0.01).
Regarding H4a, similarly, a propensity score is calculated from the first-stage
model to predict a firm with a sustainability committee. The prediction model includes
all control variables of Equation (1). Then each firm-year observation that corresponds
to a sustainability committee is matched with another observation that does not. It is
noteworthy that this PSM analysis is based on 2,166 firm-year observations. Findings
from this PSM analysis are tabulated in Table 4-8. As presented in Panel A of Table
4-8, matched variables at the first stage are statistically indistinguishable, suggesting
that the matching procedure is valid. Panel B of Table 4-8 shows that the presence of
a sustainability committee is positively related to sustainability performance, β = 7.424
(p<0.01); the firms’ experience of sustainability disclosure positively relates to
sustainability performance, β = 3.536 (p<0.01). Taken together, findings about H3 and
H4a remain qualitatively unchanged.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 147
Table 4-7 PSM – H3 Panel A presents the results of propensity-matched variables when dependent variable is a dummy
variable that reflects whether a firm’s experience of sustainability disclosure is above median.
YEAR_REPORT_DUMMY is coded with the value of one, if a firm’s experience of sustainability
disclosure is above industry-year median, and the value of zero otherwise. Panel B presents the
regression results. Variables in this table are defined in Table 2.
Panel A: Propensity-matched Variables
Treated (SC) Controlled (no SC) t-stat P-value
SIZE 14.19 14.21 -0.27 0.79
LEV 0.47 0.47 -0.03 0.98
ROA 0.07 0.07 -0.46 0.65
MTB 2.52 3.06 0.75 0.45
NEW 0.55 0.55 -0.56 0.58 RMC 0.64 0.64 -0.06 0.96
CAPEXP 0.08 0.09 -1.32 0.14
CG 70.65 70.10 -0.61 0.54
SHARECON 68.77 68.73 0.04 0.97
Panel B: PSM Regression
DV: CSP
Coeff.
(t-stat)
YEAR_REPORT_DUMMY 3.864***
(8.42)
SC 5.959***
(4.48)
SIZE 2.381*** (4.45)
LEV 3.967
(1.41)
ROA 0.017
(0.91)
MTB 0.084**
(2.00)
NEW -1.464
(-0.49)
RMC 0.247
(0.28)
CAPEXP -0.100** (-2.34)
CG 0.249***
(10.12)
SHARECON 0.023
(0.71)
Constant -2.619***
(-3.06)
Observations 912
Adjusted R-square 0.62
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
148 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
Table 4-8 PSM – H4a This chapter uses propensity score matching (PSM) to re-test H3 and H4a, namely the relationship between experience of sustainability disclosure and sustainability performance, and relationship
between the presence of a sustainability committee and sustainability performance. Panel A presents
the results of propensity-matched variables when dependent variable is sustainability performance.
Panel B presents the regression results as to H3 and H4a. Variables in this table are defined in Table
4-2. Standard errors are corrected for clustering by firms.
Panel A: Propensity-matched
Variables
Treated (SC) Controlled (no
SC)
t-stat P-value
SIZE 14.76 14.61 1.18 0.240
YEAR_REPORT 5.192 6.018 3.16 0.020
LEV 0.45 0.47 -1.89 0.059
ROA 0.07 0.07 -0.46 0.647
MTB 2.52 3.06 0.75 0.453 NEW 0.61 0.60 1.04 0.296
RMC 0.62 0.61 0.37 0.714
CAPEXP 0.08 0.09 -1.32 0.138
CG 76.76 75.54 0.79 0.431
SHARECON 68.76 68.45 0.22 0.830
Panel B: PSM Regression
DV: CSP
Coeff.
(t-stat)
SC 7.424
(4.56)***
YEAR_REPORT 3.536
(7.08)***
SIZE 3.641
(4.78)***
LEV -12.748
(-3.40)***
ROA -0.021
(-0.51)
MTB -0.010
(-0.22)
NEW -14.264
(-3.38)***
RMC 2.783 (2.17)**
CAPEXP -0.040
(-0.47)
CG 0.324
(7.94)***
SHARECON 0.039
(0.84)
CONS -5.068
(-4.44)***
Observations 671
Adjusted R-square 0.64
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 149
4.5.5 Robustness Test Two – Endogeneity in H3 and H4a – Dynamic GMM
Following Schultz et al. (2010), Wintoki et al. (2012) and Nadeem, Zaman, and
Saleem (2017), Chapter 4 uses dynamic GMM to control the effects of sustainability
performance in one period on performance in following period. Two hypotheses are
re-tested using dynamic GMM. Findings from dynamic GMM are tabulated below. As
shown in Table 4-9, the presence of a sustainability committee is positively related to
sustainability performance, β = 5.626 (p<0.01); experience of disclosure is positively
related to sustainability performance, β = 4.185 (p<0.01). Thus, the findings as to H3
and H4a remain qualitatively unchanged.
Table 4-9 Dynamic GMM – H3 and H4a This chapter uses dynamic generalised method-of-moments (GMM) to re-test H3 and H4a,
namely the relationship between experience of sustainability disclosure and sustainability
performance, and the relationship between the presence of a sustainability committee and sustainability performance. Variables in this table are defined in Table 4-2.
DV: CSP
Coeff.
(t-stat)
L1.CSP 0.117
(5.03)***
L2.CSP 0.001
(0.07)
SC 5.626
(3.54)***
YEAR_REPORT 4.185
(10.72)***
SIZE 2.209
(4.13)*** LEV 2.665
(1.28)
ROA -0.011
(-0.78)
MTB 0.014
(0.59)
NEW -8.013
(-2.98)***
RMC 2.034
(2.55)**
CAPEXP -0.013 (-0.55)
CG 0.201
(8.58)***
SHARECON -0.037
(-1.35)
CONS -14.641
(-1.48)
Observations 1266
No. of instruments 122
Arellano-Bond AR (1) -5.128***
Arellano-Bond AR (2) -0.644
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
150 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
4.5.6 Robustness Test Three – Endogeneity in H4b – Dynamic GMM
Following Schultz et al. (2010), Wintoki et al. (2012) and Nadeem, Zaman, and
Saleem (2017), Chapter 4 uses dynamic GMM to control the effects of sustainability
performance in one period on performance in the following period. H4b is re-tested
using dynamic GMM. Findings from dynamic GMM are tabulated below. As shown
in Table 4-10, the sustainability committee effectiveness is positively related to
sustainability performance, β = 7.803 (p<0.10). Thus, the finding as to H4b remains
qualitatively unchanged.
Table 4-10 Dynamic GMM – H4b This chapter uses dynamic generalised method-of-moments (GMM) to re-test H4b, namely the relationship between sustainability committee effectiveness and sustainability performance.
Variables in this table are defined in Table 4-2.
DV: CSP
Coeff.
(t-stat)
L1.CSP 0.074
(1.32)
SC_EFFE 7.803
(1.79)*
Observations 396
No. of instruments 122
Arellano-Bond AR (1) -5.04***
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
4.5.7 Robustness Test Four – Endogeneity in H4b – Two-Stage Least Squares
Regression (2SLS)
As I do not find matched samples to carry out PSM, I use a two-stage least square
(2SLS) approach to solve reverse causality and omitted variable concerns (Wooldridge
2010). As Section 4.5.1 indicates, firms in some industries are more likely to establish
sustainability committees than their peers in other industries. Thus, I expect that
sustainability committee effectiveness converges to an industry average. Restated, I
argue that sustainability committee effectiveness at firm level is influenced by year-
industry average of sustainability committee effectiveness (SC_EFFE_INDUS),
which is not directly related to sustainability performance at that firm level. Findings
rendered by the 2SLS approach are presented in Table 4-11. Panel A of Table 4-11
shows that the results of the first stage 2SLS – the endogenous variable sustainability
committee effectiveness at firm level (SC_EFFE) is significantly related to the
instrumental variable, SC_EFFE_INDUS. This supports that firm-level SC_EFFE is
closely related to its industry norms, as captured by SC_EFFE_INDUS. Panel B of
Table 4-11 shows the results of the second stage 2SLS. I find the results are consistent
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 151
with those reported in Table 4-6. To test the validity of my instrument, I conduct the
Wu–Hausman (Hausman, 1978; Wu 1974) test. The results are shown at the bottom of
Table 4-11. The null hypothesis – firms’ sustainability committee effectiveness (SC_
EFFE) is exogenous – is not rejected, indicating the validity of my instrument.
Table 4-11 2SLS – H4b This chapter uses two-stage least squares regression (2SLS) to re-test H4b, namely the
relationship between sustainability committee effectiveness and sustainability performance.
Variables in this table are defined in Table 4-2.
Panel A Stage One of 2SLS
SC_EFFE Coeff.
(t-stat)
SC_EFFE_INDUS 0.76
(4.64)***
Other Controls Included YES
Year FE YES
Industry FE YES
Panel B Stage Two of 2SLS
DV: CSP
Coeff.
(t-stat)
SC_EFFE 8.55
(3.60)***
SIZE 3.83 (3.62)***
LEV 16.03
(2.20)**
ROA -0.04
(-0.56)
MTB -0.09
(-1.39)
NEW -18.15
(-3.33)***
RMC 4.45
(2.21)**
CAPEXP -0.02 (-0.01)
CG 0.32
(5.20)***
SHARECON 0.12
(1.57)
Constant -12.20
(-7.59)***
Year FE Yes
Industry FE Yes
Observations 430
Adjusted R-square 0.55 Wu–Hausman test for validity of instrument 0.177
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
152 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
4.5.8 Robustness Test Five – Alternative Measurement on Sustainability
Performance
Three types of performance, namely sustainability performance, environmental
performance and social performance, are used in the main analysis. Following Nguyen
et al. (2018), to further test how the presence of a sustainability committee is related
to sub-categories of sustainability performance, I test nine sub-categories separately.
The findings are presented in Table 4-12. The presence of a sustainability committee
is positively related to six sub-categories, resource reduction, emission reduction,
health and safety, product responsibility, training and development and community
(refer to Panel A of Table 4-12). Sustainability committee effectiveness is positively
related to two sub-categories, namely resource reduction and emission reduction (see
Panel B of Table 4-12). The findings presented in Table 4-10 reinforce the findings
concerning H4a and H4b.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance 153
Table 4-12 Alternative Measurement on Sustainability Performance This table presents the results of the relationship between a sustainability committee and nine sub-categories of sustainability performance. Panel A presents the results of
relationships between the presence of a sustainability committee and the nine sub-categories of sustainability performance. Panel B presents the results of relationships
between effectiveness of sustainability committee and nine sub-categories of sustainability performance. Resource reduction is abbreviated as ENRR, emission reduction
is abbreviated as ENER, product innovation is abbreviated as ENPI, product responsibility is abbreviated as SOPR, health and safety is abbreviated as SOHS, training
and development is abbreviated as SOTD, diversity and opportunity is abbreviated as SODO, employment quality is abbreviated as SOEQ, and community is abbreviated as SOCO. Other variables in this table are defined in Table 4-2.
Panel A The Presence of a Sustainability Committee (1) (2) (3) (4) (5) (6) (7) (8) (9)
ENRR ENER ENPI SOEQ SOHS SOTD SODO SOCO SOPR
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
SC 3.788 (2.60)***
5.724 (4.38)***
0.106 (0.08)
1.924 (1.04)
3.217 (2.18)**
3.380 (1.92)*
0.510 (0.31)
5.411 (3.03)***
3.698 (2.32)**
CONS 42.400
(5.76)***
55.514
(8.39)***
32.820
(4.89)***
46.927
(5.02)***
51.194
(6.85)***
30.660
(3.45)***
79.350
(9.48)***
38.487
(4.25)***
60.378
(7.50)*** Controls YES YES YES YES YES YES YES YES YES Firm FE YES YES YES YES YES YES YES YES YES
Industry FE YES YES YES YES YES YES YES YES YES Year FE YES YES YES YES YES YES YES YES YES
Adjusted R-square 0.06 0.04 0.03 0.04 0.02 0.07 0.11 0.07 0.01
Panel B Effectiveness of the Sustainability Committee
(1) (2) (3) (4) (5) (6) (7) (8) (9)
ENRR ENER ENPI SOEQ SOHS SOTD SODO SOCO SOPR
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
SC_EFFE 2.539 (2.68)***
2.218 (2.68)***
0.285 (0.29)
-1.510 (1.15)
0.996 (1.08)
-0.978 (-0.88)
0.858 (0.86)
-1.660 (-1.43)
-1.326 (-1.07)
CONS 4.313 (0.09)
53.922 (1.34)***
-27.325 (-0.56)
63.725 (0.99)
82.540 (1.83)*
18.884 (0.35)
-11.748 (-0.24)
-71.114 (-1.26)
38.085 (0.63)
Controls YES YES YES YES YES YES YES YES YES Firm FE YES YES YES YES YES YES YES YES YES
Industry FE YES YES YES YES YES YES YES YES YES Year FE YES YES YES YES YES YES YES YES YES
Observations 430 430 430 430 430 430 430 430 430 Adjusted R-square 0.02 0.04 0.02 0.01 0.01 0.03 0.03 0.05 0.08
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
154 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
4.5.9 Robustness Test Six – Sectoral Analysis
Following Cho and Patten (2007) and Eccles et al. (2014), Chapter 4 classifies
the GICS industries into two pairs of categories, (1) natural versus non-natural57; (2)
business-to-consumer (B2C) and others58. In terms of the first pair, this chapter codes
the value of one for industries whose products are deemed as sensitive to sustainable
development (the natural industries), and the value of zero otherwise (the non-natural
industries) (De Villiers et al., 2011). I argue that firms in natural sectors are subject to
more pressures about corporate sustainability (Cho et al., 2015); thus, the relationship
between the presence of a sustainability committee and sustainability performance
may be affected. In terms of the second pair, Chapter 4 codes the value of one for B2C
sectors and the value of zero otherwise. Following Eccles et al. (2014), I argue that
firms in B2C sectors are more visible as they directly interact with consumers. Thus,
firms in B2C sectors care more about image and reputation than their peers in other
sectors. The relationship between the presence of a sustainability committee and
performance can be influenced by such concerns. The findings are presented in Table
4-13. Panel A of Table 4-13 presents natural versus non-natural, and Panel B of Table
4-13 reports B2C versus others.
57 Following de Villiers, Naiker and Van Staden (2011, p. 1650), natural industries include forestry,
metal mining, coal mining and oil and gas exploration, paper and pulp mills, chemicals,
pharmaceutical and plastics manufacturing, iron and steel, manufacturing and electricity, gas and
wastewater. 58 Following Eccles et al. (2014, p. 2850), B2C industries include consumer goods and finance.
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance 155
Table 4-13 Sectoral Analysis This table presents the results of sector moderation effects on the relation between the presence of a sustainability committee and sustainability performance. Panel A
shows how industry affiliation based on natural versus non-natural affects the relationship between sustainability performance and the sustainability committee. Natural is
coded as a dummy variable – firms in natural industries are coded one, and zero otherwise. Panel B shows how industry affiliation based on B2C versus others affects this
relationship. B2C is coded as a dummy variable – firms in B2C industries are coded one, and zero otherwise. Variables in this table are defined in Table 4-2.
Panel A Natural versus Non-natural
(1) (2) (3) (4) (5) (6)
CSP ENV SOC CSP ENV SOC
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
SC 0.263
(0.06)
2.523
(0.52)
-1.671
(-0.34)
-
- -
SC_EFFE - - - 3.184
(0.70)
3.618
(2.48)**
2.750
(0.21)
Natural -5.302
(-1.87)*
-6.526
(-1.93)*
-5.119
(-1.35)
46.405
(0.84)
37.217
(1.19)
5.593
(0.32)
Natural × SC 15.922
(3.29)***
13.158
(2.43)**
17.840
(3.30)***
- - -
Natural × SC_EFFE
- - - 3.837
(0.75)
3.162
(1.90)*
4.512
(0.96) CONS -35.898
(-3.82)***
-29.395
(-2.78)***
-29.881
(-2.71)***
-52.295
(-1.08)
-62.110
(-1.14)
-42.480
(-0.88)
Controls included YES YES YES YES YES YES
Firm FE YES YES YES YES YES YES
Observations 2166 2166 2166 430 430 430
Adjusted R-square 0.64 0.57 0.57 0.48 0.41 0.43
Panel B B2C versus Others
(1) (2) (3) (4) (5) (6)
CSP ENV SOC CSP ENV SOC
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
Coeff.
(t-stat)
SC 11.504
(4.23)***
12.587
(4.42)***
9.900
(3.02)***
-
- -
SC_EFFE -
- - 0.513
(1.08)
1.552
(2.10)**
-0.526
(-0.79)
156Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
B2C 0.103
(0.03)
-1.172
(-0.29)
0.455
(0.10)
6.057
(0.28)
25.367
(0.99)
-13.253
(-0.57)
B2C × SC -7.726
(-1.04)
-10.380
(-1.17)
-3.893
(-0.57)
- - -
B2C × SC_EFFE - - - 1.562
(0.78)
-0.570
(-0.24)
3.695
(0.73)
CONS -37.957
(-4.02)***
-32.163
(-3.13)***
-32.230
(-2.82)***
-12.767
(-0.49)
-37.791
(-1.27)
12.258
(0.39)
Controls included YES YES YES YES YES YES
Firm FE YES YES YES YES YES YES
Observations 2166 2166 2166 430 430 430 Adjusted R2 0.63 0.57 0.56 0.28 0.30 0.11
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 157
Regarding natural versus non-natural affiliation, this chapter identifies that the
sectoral environment of natural sectors strengthens the positive relationship between
the presence of a sustainability committee and sustainability performance, as presented
by the first three columns in the Panel A of Table 4-13. The sectoral environment
strengthens the positive relationship between sustainability committee effectiveness
and environmental performance, as presented by the fifth column in the Panel A of
Table 4-13. Regarding B2C versus other affiliation, this chapter finds that the sectoral
environment of B2C sectors affects neither the committee presence nor the committee
effectiveness, as shown by Panel B of Table 4-13. In the following section, the way in
which the sample period influences the findings regarding H4a and H4b is analysed.
4.5.10 Robustness Test Seven – Time Stability
Although Australia retained a voluntary attitude towards corporate sustainability
during the sample period, it is reasonable to argue that relevant practices have changed
within that period. As discussed in Chapter 1, awareness of corporate sustainability
increased, and available guidance about sustainability increased during the 15-year
sample period. Therefore, it is possible that findings regarding H4a and H4b may
change over time. This test selects the first five years (2002 – 2006) and the last five
years (2012 – 2016) to examine time stability. Observations from the first five years
are coded as zero, and observations of the last five years are coded as one. Findings
are presented in Table 4-14. As shown in Table 4-14, I did not find that the sample
period affects the findings regarding H4a and H4b. This chapter also re-runs the main
analyses with a sub-sample from 2010 to 2016 that consists of about 75% of data of
the presence of a sustainability committee and 70% of data of sustainability committee
effectiveness, and the findings remain largely unchanged. This chapter is concluded in
following section.
158Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
Table 4-14 Time Stability This table presents the results regarding whether time affects the relationship between sustainability performance and the presence of a sustainability committee. This chapter
selects the first five years (2002 – 2006) and the last five years (2012 – 2016) to test time stability. Time is coded as a dummy variable – observations of the first five years are
coded as zero, and observations of the last five years are coded as one. Other variables in this table are defined in Table 4.2.
(1) (2) (3) (4) (5) (6)
CSP ENV SOC CSP ENV SOC
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
SC 8.476
(0.91)
8.180
(0.74)
8.772
(1.01)
-
- -
SC_EFFE
- - - 2.369
(1.06)
4.565
(1.74)*
0.174
(0.06)
Time -17.464
(-5.09)***
-16.054
(-3.93)***
-18.874
(-4.66)***
34.985
(1.48)
61.641
(2.33)**
8.330
(0.26)
Time × SC 2.450
(0.25)
2.758
(0.49)
-0.859
(-0.10)
- - -
Time × SC_EFFE
- - - -1.318
(-0.64)
-3.382
(1.35)
0.746
(0.26)
CONS -20.707
(-1.40)
-17.639
(-1.03)
11.362
(0.53)
25.995
(0.61)
42.560
(0.84)
9.431
(0.19) Controls YES YES YES YES YES YES
Year FE NO NO NO NO NO NO
Firm FE YES YES YES YES YES YES
Observations 2166 2166 2166 430 430 430
Adjusted R2 0.53 0.46 0.48 0.06 0.02 0.26
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 159
4.5.11 Robustness Test Eight – Inclusion of Firm Age as a Control for H3 and
H4a
This chapter provides additional assurance that the findings of H3 and H4a are
not caused by excluding firm age (lnAGE) as a control. I re-estimate Equation (1) to
include firm age (lnAGE)as a control. As Table 4-15 shows, the findings of H3 and
H4a remain qualitatively unchanged.59
Table 4-15 Inclusion of Firm Age as a Control for H3 and H4a This table presents the results from including firm age (lnAGE) as a control. Other variables in this
table are defined in Table 4.2.
(1) (2) (3) (4)
DV: CSP DV: CSP DV: ENV DV: SOC
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
Coeff. (t-stat)
SC 6.04
(4.14)***
- 5.14
(3.03)***
6.02
(3.44)***
SC_NO -
6.15
(4.44)***
- -
YEAR_REPORT
4.12
(4.95)***
4.14
(5.02)***
4.77
(5.11)***
3.41
(3.57) ***
lnAGE 3.50
(3.69) ***
3.46
(3.65)***
3.57
(3.12)***
2.80
(2.38) **
Constant and other Controls included YES YES YES YES
Firm FE YES YES YES YES
Year FE YES YES YES YES Industry FE YES YES YES YES
Observations 1376 1376 1376 1376 Adjusted R-square 0.64 0.65 0.60 0.54
***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level
59 I appreciate this suggestion from the thesis reviewer.
160 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance
4.6 DISCUSSION AND CONCLUSION
As discussed in the introduction, Chapter 4 aims to analyse how the presence of
a sustainability committee and the experience of sustainability disclosure are related
to performance. By examining 2,166 firm-year observations (2002 – 2016), Chapter 4
reveals a positive relationship between the presence of a committee and performance,
and a positive relationship between the experience of disclosure and performance.
Thus, H3 is not rejected, and H4a is rejected. Examining 430 firm-year observations
about committees (2002 – 2016), this chapter finds a positive relationship between
sustainability committee effectiveness and environmental performance. Thus, H4b is
partially rejected, that is sustainability committee effectiveness is not associated with
sustainability performance as a whole. Among the four components of sustainability
committee effectiveness, authority and resources are found to be significantly related
to environmental performance. Increased resources and greater authority granted to
the sustainability committee improves sustainability performance.
As endogeneity may affect the findings in relation to H3 and H4a, the PSM and
dynamic GMM methods are used and indicate that endogeneity does not distort the
findings. In terms of the sectoral environment, sustainability committees formed by
firms in the natural sectors function better. Findings are reinforced by use of alternative
performance measurement and stable over the sample period. The conclusions reached
in this chapter are consistent with prior literature, including Peters and Romi (2014,
2015) and Dixon-Fowler et al. (2017). Chapter 4 gives insights into how sustainability
can be improved through utilising governance structures, such as board subcommittees
(Jain & Jamali, 2016) and how experience of sustainability disclosure relates to
sustainability performance. Extending Dixon-Fowler et al. (2017), Peters and Romi
(2014, 2015), Rodrigue et al. (2013) and Rankin et al. (2011), this chapter also includes
multiple characteristics of the sustainability committee in its research design.
From the theoretical perspective, the findings about H3 – a positive relationship
between firms’ experience of disclosure and sustainability performance – consist with
the arguments derived from institutional theory: firms’ experience of disclosure would
encourage firms’ sustainability practices. Findings of H4a substantiate the arguments
derived from stewardship theory that the presence of a sustainability committee is
positively related to sustainability performance, rather than the committee existing
merely as a symbol. Findings concerning H4b consist with the explanation of (audit)
Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability
Performance 161
committee effectiveness proposed by DeZoort et al. (2002) and resources dependency
theory: who sit on sustainability committees and how members are organized matter.
In terms of practical implications, I revealed two feasible avenues for improving
sustainability performance, namely the firms’ experience of sustainability disclosure
and the presence of a sustainability committee. It is noteworthy that social issues seem
to be relatively ignored by sustainability committees. Regulators and market operators
in Australia should recognize that sustainability committees as operationalized do not
include social issues in their agenda.
Findings of this chapter also suggest two future directions. First, future studies
may examine if not by the presence of a sustainability committee, which governance
mechanisms could be used to better manage social impact of corporate activities, and
why social issues are generally omitted from the agenda of a sustainability committee.
Qualitative research methods, including interview, observation, and content analysis,
are expected to shed light on the aforementioned research themes. Secondly, future
studies may examine why two components, namely composition and diligence, are not
active in sustainability performance. Again, qualitative research approaches, including
interview, may help researchers in this regard. Taken together, following Rodrigue et
al. (2013), I encourage future researchers to use qualitative or mixed methods to cast
light on their interested phenomena.
This chapter has three main limitations. First, findings in the Australian context
are generalizable to the extent of consistency of regulatory framework. Future studies
are encouraged to investigate this relationship in countries where the socio-political
environment of sustainability practice is different from the environment in Australia.
Secondly, Chapter 4 uses quantitative methods in the research design. Thus, there is a
limitation in my sample selection. For example, my sample does not include small-to-
medium enterprises in Australia. Thirdly, while I use different sources to triangulate
the data about the committee members, there still could be errors and omissions in this
set of data. In the following chapter, this thesis is concluded.
Chapter 5: Conclusions 163
Chapter 5: Conclusions
Chapter 5 concludes this thesis by summarizing the previous four chapters. In
Section 5.1, this chapter discusses how Chapter 3 and 4 collectively answer the four
research questions outlined in Chapter 1. In Section 5.2, the findings of Chapter 3 and
4 are summarized to depict a more comprehensive picture of corporate sustainability
in Australia. In Section 5.3, contributions and practical implications of this thesis are
explained. In Section 5.4, limitations of this thesis and avenues for future research are
discussed.
5.1 SUMMARY OF THIS THESIS
There are three motivations in here. First, the current regulatory environment for
voluntary corporate sustainability disclosure in Australia is under pressure to become
a more structured framework. Therefore, more understanding about current corporate
sustainability practices would actively contribute to relating policy discussion. Second,
richer knowledge about corporate sustainability would be beneficial to stakeholders,
as corporate sustainability continues to grow in importance. Third, there are many
research opportunities identified in prior literature awaiting exploration. Accordingly,
I examine three themes, namely sustainability performance, sustainability disclosure
and the effectiveness of sustainability committee. Chapter 3 and 4 focus on Australia,
examine public firms’ practices, and form part of a larger research agenda – corporate
sustainability. Chapters 3 and 4 take into account different theories (signalling theory,
institutional theory, stewardship theory and resource dependence theory) and develop
five hypotheses to explore four research questions. The five hypotheses are restated
below.
H1 There is no relationship between sustainability performance and six textual
characteristics of sustainability disclosure: a) amount of information (measured in
number of words), b) amount of quantitative information (measured by the Diction
7), c) amount of environmental impact information (measured in number of words),
d) tone of optimism (measured by the Diction 7), e) tone of certainty (measured by
the Diction 7), and f) tone of clarity (measured by the Diction 7).
164 Chapter 5: Conclusions
H2 Readability of sustainability disclosure is positively related to sustainability
performance.
H3 There is a positive relationship between a firm’s sustainability performance
and its experience of sustainability disclosure.
H4a There is no relationship between the presence of a sustainability
committee and sustainability performance.
H4b There is a positive relationship between sustainability committee
effectiveness and sustainability performance.
Chapter 5: Conclusions 165
Figure 5-1 Connections between Chapter 3 and 4
166 Chapter 5: Conclusions
Chapter 3 uses institutional theory and signalling theory to develop H1 and H2
about the relationship between textual characteristics of sustainability disclosure and
sustainability performance. Considering the literature about committee effectiveness,
Chapter 4 uses stewardship theory and resource dependency theory to come up with
three hypotheses about experience of disclosure, the presence and effectiveness of a
sustainability committee and sustainability performance (H3, H4a and H4b). Clearly,
the mature literature about corporate sustainability reviewed in Chapter 2 lays a solid
foundation for Chapter 3 and 4 in the hypothesis development and research design.
Following prior literature, this thesis uses panel regression to examine whether
empirical data substantiates its hypotheses. Sustainability disclosure information was
manually gathered from two sources: (1) annual reports, (2) standalone sustainability
reports. If there were no standalone reports, annual reports were examined to extract
the information that is relevant to sustainability. In total, 2,639 pieces of sustainability
disclosure were manually collected. Synthesizing empirical data from the Bloomberg,
the Asset4 and annual reports, the thesis identified 430 firm-year observations of
sustainability committees. It is noteworthy the details about sustainability committees
were all manually collected from annual reports and online sources, as no third-party
databases are available. ESG60 scores provided by the Asset4 are used to measure
sustainability performance. The sample period is from 2002 to 2016. Findings of the
thesis are summarized in following section.
5.2 SUMMARY OF THE FINDINGS
Chapter 3 examines how textual characteristics of sustainability disclosure are
related to sustainability performance. The textual characteristics examined in Chapter
3 include the amount of total disclosure, amount of quantitative information, amount
of environmental-impact information, readability, tone of optimism, tone of clarity and
tone of certainty. Findings about H1 and H2 are as follows.
Good performers report more sustainability disclosure, quantitative information
and information about their environmental impact. They present in optimistic, certain
and clear tones and communicate in a more readable way. Whether information is
disclosed in annual report or standalone report affects relationships between textual
60 ESG represents environmental, social and governance.
Chapter 5: Conclusions 167
characteristics and performance. Different sectoral environments affected how sample
firms prepared sustainability disclosure. Different sample periods also affect relations
between textual characteristics and performance. Findings of Chapter 3 are robust to
alternative measurement based on performance and alternative model specification.
Textual characteristics in one period do not relate to sustainability performance in a
following period, and vice versa.
Chapter 4 examines how the sustainability committee and firms’ experience
regarding sustainability disclosure relate to sustainability performance (i.e. H3, 4a and
4b). To be specific, Chapter 4 examines the sustainability committee from two aspects,
presence and committee effectiveness, and operationalizes experience of sustainability
disclosure as years of disclosure. Findings about H3, H4a and H4b are as follows.
Regarding the firms’ disclosure experience (H3), there is a positive relationship
between the experience of sustainability disclosure and sustainability performance. It
is argued that the findings about H3 consist with institutional theory. Regarding the
presence of a sustainability committee (H4a), Chapter 4 found a positive relationship
between sustainability committee presence and sustainability performance. Extending
this testing, I substitute the presence of a sustainability committee with the number of
sustainability committees to provide more evidence about this hypothesis. Regarding
sustainability committee effectiveness, a positive relationship between environmental
performance (one pillar of sustainability performance) and it is found; however, it is
not related to sustainability performance as a whole. Among the four components of
sustainability committee effectiveness, authority and resources significantly relate to
environmental performance. Increased resources and greater authority granted to the
sustainability committee improves sustainability performance. Four sets of robustness
tests are performed. First, the propensity score matching and the dynamic generalized
method-of-moments methods are used and indicate that endogeneity does not distort
the findings. Secondly, sustainability committees established by firms in the natural
sectors function better. Thirdly, discriminating the sample by the first five years and
the last five years, findings remain stable. Fourthly, findings are reinforced by analysis
of sub-categories of sustainability performance.
Table 5-1 summarizes the hypotheses and findings. Table 5-2 shows this thesis’s
conclusions and implications. In the following section, the contributions and practical
implications are elaborated.
168 Chapter 5: Conclusions
5.3 CONTRIBUTIONS AND PRACTICAL IMPLICATIONS
This thesis contributes to prior literature in at least two ways. First, it enriches
the knowledge about sustainability disclosure from linguistic perspectives. Secondly,
it contributes to the growing field, namely sustainability committee that is expected to
be an opportunity to better integrate sustainability into corporate governance.
Regarding theoretical contributions, this thesis considers several theories. First,
as prior studies suggest, the first research question relates to the explanatory power of
both signalling theory and institutional theory. Differing from prior literature, Chapter
3 explores an alternative context, namely various textual characteristics of disclosure.
Chapter 3 also introduces Bloomfield’s (2002, 2008) incomplete revelation hypothesis
into corporate sustainability literature. As Section 3.5 suggests, findings with regard
to the first research question lend support to the explanatory power of signalling theory
and incomplete revelation hypothesis – firms use sustainability disclosures to signal/
communicate their sustainability performance, rather managing institutional pressures
on sustainability. Secondly, the second research question is related to the explanatory
power of institutional theory. As Section 4.5 reports, findings with regard to the second
research question support institutional theory – more engagement in disclosure would
improve performance. Thirdly, the third research question is relevant to stewardship
theory and resource dependency theory in the context of sustainability committees. As
Section 4.5 suggests, findings of the third question support the explanatory power of
stewardship theory – sustainability committees are formed to improve sustainability
performance, rather only delivering symbolic meanings; the findings also lend support
to resource dependency theory – sustainability committee effectiveness affects to what
extent sustainability committees contribute to firms’ sustainability performance.
Regarding practical implications, this thesis finds interesting patterns. First, if
greenwashing is defined as the intersection of two behaviours: negative performance
and positive disclosure (Delmas & Burbano, 2011), the findings of Chapter 3 do not
support the presence of greenwashing in sustainability disclosure. Thus, this suggests
the voluntary-disclosure status in Australia does not induce this undue phenomenon or
rhetorical strategy of concern to many stakeholders. Second, readability of
sustainability disclosure would be considered by regulators, as Chapter 3 reveals that
those who read sustainability disclosure information can be misled and distracted by
how firms with worse performance present their data. Taken together, instead of
Chapter 5: Conclusions 169
mandating sustainability disclosure in general, regulators can pay closer attention to
readability of sustainability disclosure. Third, as the presence of a sustainability
committee and the experience of disclosure demonstrably contribute to sustainability
performance, I urge regulators to encourage firms to form their own sustainability
committee(s) and to actively engage in sustainability disclosure. Table 5-1 summarizes
this thesis’s hypotheses and findings. I summarize conclusions as well as implications
in Table 5-2. Limitations and future research of this thesis are discussed in following
section.
170 Chapter 5: Conclusions
Table 5-1 Summary of Research Questions, Hypotheses and Findings RQ Hypothesis Direction Finding
RQ1: Whether and how is an
Australian firm’s sustainability
performance associated with its
sustainability disclosure?
H1 There is no relationship between sustainability performance and six textual characteristics of
sustainability disclosure: a) amount of information (measured in number of words), b) amount of
quantitative information (measured by the Diction 7), c) amount of environmental impact
information (measured in number of words), d) tone of optimism (measured by the Diction 7), e)
tone of certainty (measured by the Diction 7), and f) tone of clarity (measured by the Diction 7).
0 +
H2 Readability of sustainability disclosure is positively related to sustainability performance. + +
RQ2: How is experience of
sustainability disclosure related to
sustainability performance?
H3 There is a positive relationship between a firm’s sustainability performance and its experience of
sustainability disclosure.
+ +
RQ3a: How is the presence of a
sustainability committee related to
sustainability performance?
H4a There is no relationship between the presence of a sustainability committee and sustainability
performance.
0 +
RQ3b: How is the effectiveness of the
sustainability committee related to
sustainability performance?
H4b There is a positive relationship between sustainability committee effectiveness and sustainability
performance.
+ +/0
Chapter 5: Conclusions 171
Table 5-2 Summary of Research Conclusions and Implications RQ Theoretical Assumption Previous Findings Conclusions based on
this Thesis
Implications for
Theory
Implications for Practice Implications for
Further Research
RQ1: Whether and
how is an
Australian firm’s
sustainability
performance
associated with its
sustainability
disclosure?
Signalling theory argues
that firms with better
performance use
sustainability disclosure
to distinguish themselves;
institutional theory
suggests that poor
performers disclose
sustainability information
in a way that disguises
their poor performance and misleads
stakeholders.
Prior literature
reaches mixed
findings. It is
noteworthy that a
number of studies
reveal poor
performers report
more sustainability
disclosure and
present in an
optimistic and certain way.
Good performers report
more sustainability
disclosure, quantitative
information and
information about their
environmental impact.
They present in an
optimistic, certain and
clear way and also
communicate in a more
readable way.
Supports
• Signalling
theory
• Incomplete revelation
hypothesis.
The voluntary-disclosure
status in Australia does
not induce a combination
of negative performance
with positive disclosure,
an undue phenomenon
concerned by many
stakeholders. Poor
performers are likely to
present their disclosure in
a less readable way, potentially leading to
biased decisions.
• To investigate
settings where the
environment of
sustainability
practice is
different from that
in Australia.
• To explore
whether good
performers unduly
positively present.
RQ2: How is
experience of
sustainability disclosure related
to sustainability
performance?
Institutional theory
conjectures that
experience of disclosure can raise awareness of
sustainability practice
within firms and equip
decision makers with the
knowledge about how to
practice sustainability,
leading to better
performance.
N/A Firms that have engaged
in sustainability
disclosure for longer durations deliver better
performance.
Supports
• Institutional
theory
Regulators and market
operators in Australia
could encourage firms to engage in sustainability
disclosure, leading to
better sustainability
performance.
• To reveal more
details about the
effects of sustainability
disclosure on how
firms practice
sustainability
performance.
172 Chapter 5: Conclusions
RQ Theoretical Assumption Previous
Findings
Conclusions based on
this Thesis
Implications for
Theory
Implications for
Practice
Implications for
Further Research
RQ3a: How is the
presence of a
sustainability
committee related
to sustainability
performance?
Stewardship theory argues that
board committees are formed to
better assist directors and senior
management in monitoring and
strategic decision-making, and
for the directors to provide good
stewardship to the resources
entrusted to them. But
greenwashing suggests that a
sustainability committee is
formed to maintain legitimacy and improve reputation, not
necessarily relating to
sustainability performance.
Prior literature
reaches mixed
findings.
The presence of a
sustainability
committee is positively
related to sustainability
performance.
Supports
• Stewardship
theory.
A sustainability
committee seems to
be a governance
structure that can
improve
sustainability
performance.
• To explore this
research question in
countries where the
environment of
sustainability
practice is different
from that in
Australia.
RQ3b: How is the
effectiveness of the
sustainability
committee related
to sustainability
performance?
Resources dependency theory
argues that a sustainability
committee is deemed as the nexus
between a firm and its essential
resources, which the firm requires
to improve sustainability
performance.
Prior literature
suggests that
committee
effectiveness
relates to how the
board committee
functions.
Sustainability
committee
effectiveness is
positively related to
environmental
performance; among
pillars of committee
effectiveness, resources and authority are found
to be significant.
Supports
• Resources dependency
theory.
Regulators and
market operators in
Australia could
encourage firms to
set up their own
sustainability
committees and
maintain committee
effectiveness.
• To investigate if not
by sustainability
committee, which
governance
mechanisms can be
used to better
manage social
impact of corporate activities.
• To examine why
social issues are less
considered by
sustainability
committee.
Chapter 5: Conclusions 173
5.4 LIMITATIONS AND OPPORTUNITIES FOR FUTURE RESEARCH
Findings rendered by this thesis shed light on future research opportunities. First,
my findings in the Australian context are generalizable to the extent of consistency of
regulatory framework. Future studies are encouraged to investigate my research topics
in countries where the socio-political environment of sustainability practice is different
from that in Australia. For example, future studies may investigate whether mandatory
sustainability disclosure influences the relationship between what are disclosed and
what are performed (refer to Chapter 3). Secondly, a dictionary-based approach is used
to measure seven textual characteristics. Following Loughran and McDonald (2016),
I encourage future studies to use alternative methods (e.g. machine learning) to explore
these textual characteristics. Thirdly, this thesis reveals that sustainability disclosure
does not hide poor performance, yet it is uncertain whether firms boast performance
in sustainability disclosure at a level that misleads users of disclosure. In this context,
boast refers to firms overly positively present their sustainability performance. While
this is not within the scope of this thesis, future studies are encouraged to understand
how disclosure users react to the textual characteristics concerned by different research
methods. For example, doing experiments with users of sustainability disclosure can
shed light on how textual characteristics of disclosure affect their perceptions to firms’
sustainability performance. Fourthly, it is reasonable to argue that qualitative methods
can greatly extend the findings of this thesis. Future studies may explore if not by
sustainability committee, which governance mechanisms could be used to better
manage social impact of corporate activities, and why social issues are generally
omitted from the agenda of a sustainability committee. Following Higgins et al.
(2015), I suggest that qualitative methods can open up novel theoretical explanations
regarding corporate sustainability practices in Australia. Fifthly, being limited by the
data sources, my sample does not include small-to-medium enterprises in Australia. I
encourage future studies to investigate corporate sustainability practices of small-to-
medium enterprises, a very promising research direction.
Appendices 175
Appendices
Appendix A
Details about Asset4’s Scores
As Figure 3-1 and Figure 3-2 present, Asset4’s scores have four pillars, namely
environmental scores/ performance, social scores/ performance, corporate governance
scores/ performance and economic scores/ performance. Details about each pillar are
tabulated below. It is argued that environmental scores/ performance and social scores/
performance measure a firm’s sustainability performance but not a firm’s disclosure,
and corporate governance scores/ performance does not measure a firm’s sustainability
performance. The information tabulated below is directly replicated from Asset4 ESG
Data Glossary.61
61 This Glossary is downloaded from
https://uvalibraryfeb.files.wordpress.com/.../asset4_esg_data_glossary_april2013.xlsx (access date is
24 July 2019).
176 Appendices
Sub-categories Asset4
Code
Description
Emission Reduction ENER The emission reduction category measures a firm’s management commitment and effectiveness towards reducing environmental
emission in the production and operational processes. It reflects a firm’s capacity to reduce air emissions (greenhouse gases, F-
gases, ozone-depleting substances, NOx and SOx, etc.), waste, hazardous waste, water discharges, spills or its impacts on
biodiversity and to partner with environmental organisations to reduce the environmental impact of the firm in the local or
broader community.
Product Innovation ENPI The product innovation category measures a firm’s management commitment and effectiveness towards supporting the research
and development of eco-efficient products or services. It reflects a firm’s capacity to reduce the environmental costs and burdens
for its customers, and thereby creating new market opportunities through new environmental technologies and processes or eco-
designed, dematerialized products with extended durability.
Resource Reduction ENRR The resource reduction category measures a firm’s management commitment and effectiveness towards achieving an efficient
use of natural resources in the production process. It reflects a firm’s capacity to reduce the use of materials, energy or water,
and to find more eco-efficient solutions by improving supply chain management.
Customer /Product
Responsibility
SOPR The customer/product responsibility category measures a firm’s management commitment and effectiveness towards creating
value-added products and services upholding the customer’s security. It reflects a firm’s capacity to maintain its license to
operate by producing quality goods and services integrating the customer’s health and safety, and preserving its integrity and
privacy also through accurate product information and labelling.
Society /Community SOCO The society/community category measures a firm’s management commitment and effectiveness towards maintaining the firm’s
reputation within the general community (local, national and global). It reflects a firm’s capacity to maintain its license to
operate by being a good citizen (donations of cash, goods or staff time, etc.), protecting public health (avoidance of industrial
accidents, etc.) and respecting business ethics (avoiding bribery and corruption, etc.).
Society /Human Rights SOHR The society/human rights category measures a firm’s management commitment and effectiveness towards respecting the
fundamental human rights conventions. It reflects a firm’s capacity to maintain its license to operate by guaranteeing the
freedom of association and excluding child, forced or compulsory labour.
Workforce /Diversity and
Opportunity
SODO The workforce/diversity and opportunity category measures a firm’s management commitment and effectiveness towards
maintaining diversity and equal opportunities in its workforce. It reflects a firm’s capacity to increase its workforce loyalty and
productivity by promoting an effective life-work balance, a family friendly environment and equal opportunities regardless of
gender, age, ethnicity, religion or sexual orientation.
Appendices 177
Workforce /Employment
Quality
SOEQ The workforce/employment quality category measures a firm’s management commitment and effectiveness towards providing
high-quality employment benefits and job conditions. It reflects a firm’s capacity to increase its workforce loyalty and
productivity by distributing rewarding and fair employment benefits, and by focusing on long-term employment growth and
stability by promoting from within, avoiding lay-offs and maintaining relations with trade unions.
Workforce /Health & Safety SOHS The workforce/health & safety category measures a firm’s management commitment and effectiveness towards providing a
healthy and safe workplace. It reflects a firm’s capacity to increase its workforce loyalty and productivity by integrating into its
day-to-day operations a concern for the physical and mental health, well-being and stress level of all employees.
Workforce /Training and
Development
SOTD The workforce/training and development category measures a firm’s management commitment and effectiveness towards
providing training and development (education) for its workforce. It reflects a firm’s capacity to increase its intellectual capital,
workforce loyalty and productivity by developing the workforce’s skills, competences, employability and careers in an
entrepreneurial environment.
Margins /Performance ECPE The margins/performance category measures a firm’s management commitment and effectiveness towards maintaining a stable
cost base. It reflects a firm's capacity to improve its margins by increasing its performance (production process innovations) or
by maintaining a loyal and productive employee and supplier base.
Profitability /Shareholder
Loyalty
ECSL The profitability/shareholders loyalty category measures a firm's management commitment and effectiveness towards generating
a high return on investments. It reflects a firm's capacity to maintain a loyal shareholder base by generating sustainable returns
through a focused and transparent long-term communications strategy with its shareholders.
Revenue /Client Loyalty ECCL The revenue/client loyalty category measures a firm’s management commitment and effectiveness towards generating
sustainable and long-term revenue growth. It reflects a firm’s capacity to grow, while maintaining a loyal client base through
satisfaction programmes and avoiding anti-competitive behaviours and price fixing.
Board of Directors/Board
Functions
CGBF The board of directors/board functions category measures a firm’s management commitment and effectiveness towards
following best practice corporate governance principles related to board activities and functions. It reflects a firm’s capacity to
have an effective board by setting up the essential board committees with allocated tasks and responsibilities.
Board of Directors/Board
Structure
CGBS The board of directors/board structure category measures a firm’s management commitment and effectiveness towards following
best practice corporate governance principles related to a well balanced membership of the board. It reflects a firm’s capacity to
ensure a critical exchange of ideas and an independent decision-making process through an experienced, diverse and
independent board.
Board of
Directors/Compensation
Policy
CGCP The board of directors/compensation policy category measures a firm’s management commitment and effectiveness towards
following best practice corporate governance principles related to competitive and proportionate management compensation. It
178 Appendices
reflects a firm’s capacity to attract and retain executives and board members with the necessary skills by linking their
compensation to individual or firm-wide financial or extra-financial targets.
Integration/Vision and
Strategy
CGVS The integration/vision and strategy category measures a firm’s management commitment and effectiveness towards the creation
of an overarching vision and strategy integrating financial and extra-financial aspects. It reflects a firm’s capacity to
convincingly show and communicate that it integrates the economic (financial), social and environmental dimensions into its
day-to-day decision-making processes.
Shareholders /Shareholder
Rights
CGSR The shareholders/shareholder rights category measures a firm’s management commitment and effectiveness towards following
best practice corporate governance principles related to a shareholder policy and equal treatment of shareholders. It reflects a
firm’s capacity to be attractive to minority shareholders by ensuring them equal rights and privileges and by limiting the use of
anti-takeover devices.
Appendices 179
Appendix B
Example of Sustainability Disclosure – Input to Diction 7
I use the sustainability disclosure from Independence Group NL (IGO) in 2016
as an example. IGO is an Australian firm listed on the Australian Securities Exchange,
is a diversified mining, development and exploration firm, and also is a constituent of
ASX 200. IGO began to publish standalone sustainability report in 2015. As IGO’s
operation sites are within Australia, it is a typical mining firm in Australia. The picture
below demonstrates what an input to Diction 7 looks like.
180 Appendices
Appendices 181
Appendix C
Outputs from Diction 7
I show the outputs from Diction 7 corresponding to the sustainability disclosure
of IGO in 2016 (see the Appendix B) in this appendix. The outputs from Diction 7
consist of four panels: summary, processed text, counts and variables. The four panels
can be viewed in File Report Viewer. Statistics in the summary panel are used for my
data analysis. Certainty, defined as “language indicating resoluteness, inflexibility, and
completeness and a tendency to speak ex cathedra” (Digitext, 2015, p. 6), consists of
eight calculated variables – [Tenacity + Levelling Terms + Collectives + Insistence] −
[Numerical Terms + Ambivalence + Self Reference + Variety]. Optimism, which is
defined as “language endorsing some person, group, concept or event or highlighting
their positive entailments” (Digitext, 2015, p. 7), consists of six calculated variables –
[Praise + Satisfaction + Inspiration] − [Blame + Hardship + Denial]. More information
about these calculated variables are also included in here.
182 Appendices
Appendices 183
184 Appendices
Appendices 185
186 Appendices
(Digitext, 2015, p. 6)
Appendices 187
(Digitext, 2015, p. 7)
188 Appendices
Appendix D
Principal Component Analysis of Four Readability Indices
Chapter 3 synthesizes four readability indices, including Flesch Reading Ease
Score (FRE), Flesch-Kincaid Grade Level Score (FKGL), Coleman-Liau Index (CLI)
and Simple measure of Gobbledygook (SMOG). The greater FRE score relates to more
readable disclosure, the greater FKGL score associates with less readable disclosure,
the greater CLI means less readable disclosure, and the greater SMOG score indicates
less readable disclosure. To make interpretation easier and consistent, I multiply minus
one with the FKGL, CLI and SMOG to ensure that the greater a score is, a sentence is
more readable.
Eigenvalue Loading
Comp1 2.618 0.654
Comp2 0.969 0.242
Comp3 0.398 0.100
Comp4 0.016 0.004
Appendices 189
Appendix E
Example of a Sustainability Committee
I use the sustainability committee from Crown Resorts Limited in 2015 as an
example. As a gaming and entertainment firm, Crown Resorts Limited is a constituent
of ASX 200.
190 Appendices
Appendix F
Example of How Information about Committee Members is Collected
I use Helen Coonan, the chair of Corporate Social Responsibility Committee of
Crown Resorts Limited in 2015 as an example to show how I collect information about
each committee member in Chapter 4. The 2015 Annual Report of Crown Resorts
Limited provided much information about Helen Coonan. The first picture is selected
from Page 40 of the 2015 Annual Report, the second picture is selected from Page 53,
the third picture is selected from Page 54, and the fourth picture is selected from Page
58.
Appendices 191
192 Appendices
Appendices 193
The 2015 Annual Report provided much information about Helen Coonan. As
the prior work experience of Helen Coonan has been not comprehensively reported in
the firm’s annual report, I have to use other external sources to search for evidence of
her experience and expertise. I used Bloomberg to search Helen Coonan, as presented
below,62 as the information provided by Bloomberg enriches the 2015 Annual Report.
62 The webpage can be found on
https://www.bloomberg.com/research/stocks/people/person.asp?personId=143871771&privcapId=206
08200 (access date is 16 June 2019).
194 Appendices
Appendices 195
I also used Google to collect more information about Helen Coonan to evaluate
the level of her expertise, justifying that Helen Coonan is a sustainability expert. The
below picture is a piece of information linked by Google.63
Using the 2015 Annual Report and external sources, I collected comprehensive
information about Helen Coonan regarding the sustainability committee effectiveness
measure. There are two caveats to readers. First, how to differentiate higher education
qualifications from other qualifications needs to be better clarified. For example, Helen
Coonan has been awarded two higher education qualifications (i.e. B.A. and L.L.B.).
While Helen Coonan also obtained other professional qualifications (e.g. barrister and
solicitor in Queensland), these two qualifications are not counted as higher education
63 The webpage can be found on https://cew.org.au/members/helen-coonan/ (access date is 16 June
2019).
196 Appendices
qualifications. Secondly, how to determine sustainability expert needs to be clarified.
For example, Helen Coonan is classified as a sustainability expert, as she has very rich
experience in various philanthropic organizations.
Appendices 197
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