Revisiting carbon disclosure and performance: Legitimacy and management views

Revisiting carbon disclosure and performance: Legitimacy and management views

The British Accounting Review xxx (2017) 1e15 Contents lists available at ScienceDirect The British Accounting Review journal homepage: www.elsevier...

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The British Accounting Review xxx (2017) 1e15

Contents lists available at ScienceDirect

The British Accounting Review journal homepage: www.elsevier.com/locate/bar

Revisiting carbon disclosure and performance: Legitimacy and management views Wei Qian a, *, Stefan Schaltegger b a

Centre for Sustainability Governance, School of Commerce, University of South Australia Business School, GPO Box 2471, Adelaide, SA 5001, Australia b Centre for Sustainability Management (CSM), Leuphana University Lüneburg, Scharnhorststr. 1, D-21335 Lüneburg, Germany

a r t i c l e i n f o

a b s t r a c t

Article history: Received 6 August 2015 Received in revised form 18 May 2017 Accepted 19 May 2017 Available online xxx

With corporate disclosure of carbon emissions rapidly increasing, the long-standing question remains whether carbon disclosure has any influence on the improvement of carbon performance. Previous studies of environmental disclosure and performance have predominantly focused on whether disclosure is a substitute for poor performance. Little attention has been devoted to the more important question about how changes in disclosure may lead to subsequent changes in performance over time. Following the rationales taken by the legitimacy and management perspectives, we revisit the relationship between carbon disclosure and performance, with a focus on changes that disclosure may (or may not) create. Using a change analysis of Global 500 companies and their carbon emission and disclosure data released between 2008 and 2012, this study finds that the change in carbon disclosure levels is positively associated with a subsequent change in carbon performance (examined through direct and indirect carbon emission intensities). Thus, regardless of whether disclosure has been used as a legitimising tool for prior poor performance, this study confirms that carbon disclosure motivates companies and creates an ‘outside-in’ driven effect for subsequent change and improvement in carbon performance. However, the association between changes in carbon disclosure and performance is relatively weaker in high energy-intensive firms. © 2017 Published by Elsevier Ltd.

Keywords: Carbon disclosure Carbon performance Environmental disclosure Environmental performance Scope 1 emission intensity Total carbon emission intensity

1. Introduction Managing and reporting carbon emissions have become increasingly popular among large corporations. Ernst and Young's (2012) survey finds that more than 75% of large global companies have set carbon emission reduction targets and disclosed carbon emission information, with another 16% indicating that they plan to do so in five years. Similarly, KPMG's (2015) survey reveals that 73% of the top 100 companies across 45 countries report their social and environmental responsibility activities publicly, an increase from just over 50% in 2008. The Carbon Disclosure Project (CDP), a voluntary yet more direct corporate response to increasing carbon disclosure demands, indicates that by 2016, 97% of world-leading companies have established carbon emission reduction initiatives, and 85% have formulated and reported absolute or relative carbon emission reduction targets (CDP, 2016).

* Corresponding author. E-mail address: [email protected] (W. Qian). http://dx.doi.org/10.1016/j.bar.2017.05.005 0890-8389/© 2017 Published by Elsevier Ltd.

Please cite this article in press as: Qian, W., & Schaltegger, S., Revisiting carbon disclosure and performance: Legitimacy and management views, The British Accounting Review (2017), http://dx.doi.org/10.1016/j.bar.2017.05.005

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With the increasing acceptance of climate change as one of the most discussed political, societal and business issues globally, alongside the introduction of regulations to tackle the challenge of global warming, such as the Emission Trading Scheme (ETS) in the European Union and carbon taxes (or similar pricing mechanisms) in several other countries (e.g. Australia,1 Japan, Norway, South Korea and Switzerland), we expect carbon disclosure will continue to increase. In particular, carbon disclosure is becoming a de facto standard for large businesses. However, despite the increase, it remains unclear to what extent the disclosure of carbon emissions is associated with the improvement of carbon performance. This issue relates to a long-standing question as to whether the rapid changes in carbon disclosure have had any effect on changes in carbon performance. Previous studies of environmental disclosure and performance have predominantly focused on whether disclosure is a substitute for poor performance (Cho & Patten, 2007; Cho, Guidry, Hageman, & Patten, 2012; Freedman & Jaggi, 2010) or whether different environmental performers disclose different environmental information (Freedman & Jaggi, 2005; Hughes, Anderson, & Golden, 2001). However, to date, no research has investigated the question of whether changes in disclosure are linked to changes in performance. This issue needs to be brought to the fore because it relates to the fundamental question about whether organisations change their performance when changing their disclosure. Following the rationales adopted by the legitimacy and management perspectives, we revisit the relationship between carbon disclosure and performance, yet with a unique focus on what changes of disclosure may (or may not) create. The legitimacy perspective has thus far been prevalent in examining who discloses information (such as predominantly low performers) and why companies disclose environmental information (such as to compensate for high environmental impacts). In this vein of studies, business activities are considered reactions to external pressures and incentives. Businesses are positioned as adaptive entities that react to environmental challenges expressed by stakeholders. Studies taking the legitimacy perspective in examining environmental disclosure argue that poorer environmental performers are more likely to disclose more and better because they must legitimise and compensate for their poor performance (Cho & Patten, 2007; Cho et al., 2012; Clarkson, Overell, & Chapple, 2011; Patten, 2002). However, these studies barely follow the actions and changes that corporations may take afterwards. Do companies disclose carbon information to secure legitimacy without any further changes in performance? One possible conclusion is that once disclosure has been used effectively as a legitimising tool for low performance, management has no incentive to improve performance. However, it is also possible that management could take a risk-averse approach by trying to improve performance to reduce the gap between active disclosures and (less) bad performance. The management-orientated perspective presents a contrasting view by emphasising incremental change, and arguing that companies can act proactively with regard to environmental challenges and climate change. This view acknowledges that management can aim to increase environmental performance without disclosure, yet also addresses the relationship between disclosure and performance. From this perspective, carbon disclosure can either be the final stage of communicating performance improvement (Schaltegger & Wagner, 2006 call this the ‘inside-out’ view) or a means to motivate the organisation to (further) improve performance. In the latter case, companies may be keen to create reputational business cases for sustainability using disclosure as an ‘outsidein’ opportunity for middle management and employees to create performance change (Burritt & Schaltegger, 2010; Dawkins & Fraas, 2011a). The management rationale for change is that, regardless of whether disclosure has been used as a legitimising tool for prior poor performance (which has been examined by many prior studies), disclosure can be used as a management motivation for subsequent change and a means to achieve carbon reduction and performance improvement. Both perspectives and rationales have their merits and possibilities. Therefore, we consider both views in examining the extent to which disclosure changes are linked to performance changes. As this study examines changes over time, we conduct a change analysis to identify the association between carbon disclosure and subsequent performance changes. Compared to the prevailing ‘levels’ analysis, a ‘changes’ analysis increases the power of tests by examining the causes and consequences of developing environmental strategies and performance (Clarkson, Li, Richardson, & Vasvari, 2011). Our empirical analysis uses a sample of Global 500 firms for a five-year period between 2008 and 2012. We follow the trajectory of company disclosure and objectively measured performance outcomes (i.e. actual emission levels) over five years to capture the changes and their effects. Our investigation contributes to the extant literature in three ways. First, this study is directly relevant to business practitioners who have constantly been pressed to deal with climate challenges and report their low-carbon and energy efficiency strategies (Busch & Hoffmann, 2011; Hoffmann & Busch, 2008). A vast majority of the practitioner literature has assumed or suggested an alignment between reporting and performance achievement (e.g. CorporateRegister, 2008; Ernst & Young, 2012; KPMG, 2011). The academic literature has nevertheless questioned this alignment and the usefulness of (voluntary) environmental disclosures (Deegan, 2002; Frost & Wilmshurst, 2000; Lyon & Maxwell, 2011). Therefore, this research will be valuable for managers to understand whether disclosure pressure can be used to enhance and motivate performance improvement. Second, this study is relevant to governments and policy makers in particular. Depending on which factors drive corporations to manage carbon issues, different policy recommendations can be made. If the legitimacy logic prevails in practice, which means companies disclose, yet continue with little performance change, public policies that focus on standardising disclosure, benchmarking company performance with policy goals, and auditing and verifying carbon disclosure to improve accountability and transparency would be recommended. Standardised disclosure of actual performance would make

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Australia implemented a carbon tax on 1 July 2012, but repealed this mechanism in July 2014.

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rankings easier and more reliable. Prizes for best carbon disclosures on the basis of sustainability benchmarks may help improve the visibility of carbon performance. This is because the (potential) legitimising effect of disclosure can only be seen through if high transparency and performance comparability in the reports are achieved. In contrast, if corporations have started to follow the management-orientated logic, which means they disclose, change, perform and then change further, future policies may be directed to motivate reporting, and most importantly, to strengthen the ability of management and employees to effectively improve performance. In this rationale, increasing knowledge on carbon management and accounting would help companies develop their carbon reduction management strategies and implement performance measurement and management tools. Further measures and guidelines for carbon cost accounting and management systems, eco-efficiency measures, and illustrative case studies serving as good practice examples would be advised. Finally, this study contributes to the existing environmental management and accounting literature, which has intensely debated the role of reporting in the past. The focus of prior studies has been predominantly on strategies and explanations for environmental disclosure, with little attention given to the relevance of disclosure to actual environmental performance changes. Little is known about the extent to which external-orientated carbon disclosures (outside) can be used to develop (inside) behaviour and performance change over time. Hartmann, Perego, and Young (2013) highlight the disproportionate focus on carbon disclosure rather than carbon performance measures and management in both practice and academic research. Developed through a legitimacy lens and the outside-in management approach, the current study adds to the literature by providing explanations and evidence about carbon performance improvements following disclosure changes. The remainder of this paper is organised as follows. Section 2 reviews the existing literature regarding the relationship between environmental disclosure and environmental performance, which assists in generating the hypotheses for this study. Section 3 discusses the research method used for data collection and the measurement of variables, followed by analysis of the findings in Section 4. The paper concludes in Section 5 with a summary of the results, discussion of the study limitations and suggestions for future research.

2. Literature review and hypotheses development Accounting researchers have debated and investigated environmental disclosure and performance for over a decade. Earlier studies mostly focus on whether a difference in environmental disclosure reflects a difference in environmental performance based on cross-sectional comparisons. For example, Hughes et al. (2001) examine environmental disclosures of 51 United States (US) manufacturing companies in the early 1990s. They find that companies with different environmental ratings disclose differently and poor performers disclose the most. The series of studies undertaken by Freedman and Jaggi (2004, 2005, 2010) specifically discuss the association between carbon emissions and disclosure. Their investigations reveal limited carbon disclosure in the 1990s and focus on level comparisons, such as testing whether higher emitters are likely to disclose more emission information. Over the past few years, empirical analyses have pursued similar questions, yet in different contexts. For example, Font, €usler (2012) investigate how reliably corporate responsibility disclosures reflect Walmsley, Cogotti, McCombes, and Ha actual corporate performance and operations in 10 hotel industry groups. Their results reveal a disclosureeperformance gap, with company size influencing the size of this gap. Sutantoputra, Lindorff, and Johnson (2012) repeat the investigation of the association between environmental disclosure and performance using data from 53 Australian companies. In contrast to other studies, they find no significant relationship between environmental performance and the level of environmental disclosure. Luo and Tang (2014) take this investigation a step further by comparing companies in the US, the United Kingdom and Australia. Different from the results of Font et al. (2012) and Sutantoputra et al. (2012), Luo and Tang (2014) find that good environmental performers disclose more carbon information. However, their focus is still on ‘who disclose more’ based on single-year observations with no lead-lag adjustment. The intention of the current study is not to enter the debate about who (good or poor performers) are more likely to disclose (more or less) carbon information, or whether disclosure reflects true performance, as observed in previous studies. Instead, in complementing the extant literature, we are interested in corporate performance changes following changes of disclosure, and, to our best knowledge, there is little evidence on this issue thus far. As stated by Gray and Milne (2015, p. 52), sustainability disclosure research is partial and incomplete because it discusses little about the actual change and effects of social and environmental performance. For example, little is known about whether individual companies change their disclosure behaviour over time, and whether these changes have an effect (if any) on changes in carbon performance. In practice, these are more important questions for business managers and regulators when deciding whether to support disclosure activities and disclosure quality improvements. Nevertheless, the different views on the link between environmental disclosure and performance expressed in prior studies provide useful insights for our investigation. Following the legitimacy argument, disclosure is a substitute for poor environmental performance (Patten, 2002; 2015). Once legitimised, companies may choose to continue disclosure (on the same or an improved disclosure level), yet not perform. Following the ‘outside-in’ management view, disclosure can be used as a management tool to create organisational pressure and incentives. Implementing outside-orientated disclosure inside the organisation may support managers to deal with different decision situations (Burritt & Schaltegger, 2010; Schaltegger &

Please cite this article in press as: Qian, W., & Schaltegger, S., Revisiting carbon disclosure and performance: Legitimacy and management views, The British Accounting Review (2017), http://dx.doi.org/10.1016/j.bar.2017.05.005

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Burritt, 2010) and engage in improving performance. Clearly, these views, which inform our hypotheses, present different arguments on whether disclosure changes are (un)likely to be followed by carbon performance changes.

2.1. Disclose yet do not performdfollowing a legitimacy view From the legitimacy perspective, business corporations and their activities need to be, or should appear to be, congruent with the values of the social system in which they operate (Deegan, 2002; Dowling & Pfeffer, 1975). Suchman (1995) defines legitimacy as a generalised perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed systems of norms, values, beliefs and definitions. Companies increase their disclosure of social and environmental information in order to respond to social expectations and various stakeholder pressures (Al-Tuwaijri, Christensen, & Hughes, 2004; Branco & Rodrigues, 2008; Clarkson, Li, Richardson, & Vasvari, 2008; Cormier, Gordon, & Magnan, 2004). KPMG's (2008) survey highlights that over 50% of the 250 largest companies identify improving stakeholder relationships as a reason for reporting. This suggests that disclosure can be used as a legitimacy instrument to demonstrate corporate conformance to social norms and stakeholder expectations, thereby guaranteeing the societal survival and success of the company (Deegan, 2002; Zimmerman & Zeitz, 2002). As legitimacy theory posits that social and environmental disclosure is a function of pressure by external stakeholders (overlapping with stakeholder theory), disclosure is just a tool used by firms to obtain, maintain and repair their legitimacy status in society (Deegan, 2002; O'Donovan, 2002; Patten, 2002). Companies may disclose information to manipulate or educate stakeholders in order to obtain their support and approval because it is often easier to manage image than to make actual commitments to sustainability performance (Dowling & Pfeffer, 1975; Lyon & Maxwell, 2011; Neu, Warsame, & Pedwell, 1998). A series of empirical studies by Patten (1992, 2002) and Cho and Patten (2007) support the legitimacy view by revealing the negative relationship between environmental disclosure and performance among large US firms. Worse environmental performers have been consistently found to make relatively more extensive disclosures to maintain their environmental reputation, which suggests that corporate disclosure is not used by leading companies to communicate achievements and improvements, but as a legitimacy instrument for laggards (Cho et al., 2012). Similarly, Cowan and Deegan (2011) find that although carbon disclosures have increased during the implementation period of the Australian National Pollutant Inventory, these disclosures appear to have been provided as a purely reactive exercise to reduce the legitimacy gap between community and government expectations of carbon emission levels and corporate carbon performance. In a comparison of the environmental reporting quality of Australian firms between 2002 and 2006, Clarkson, Overell et al. (2011) find that firms with a higher pollution propensity consistently disclose more environmental information in both years compared. Legitimacy theory supporters do not believe disclosure will either reflect or affect performance, or, if it does affect performance, the effect will be negative. Cowan and Deegan (2011) argue that carbon disclosure is a means to close the legitimacy gap and is thereby unlikely to represent actual environmental operations and performance. Patten (2015) suggests that if environmental disclosure mitigates the negative effects of environmental performance on companies' reputations and ‘speaks’ louder than actions (Cho et al., 2012), it will reduce the incentives for companies to engage with environmental practices and improve performance. Critical views contend that, with the definition of sustainability remaining contested, there is little hope for sustainability accounting and reporting to drive real change (Gray & Milne, 2002; Gray, 2010). Growing voluntary social and environmental disclosures are merely viewed as greenwash or suspicion of conspiracy to mislead (Gray, 2006; Lyon & Maxwell, 2011). Milne, Tregidga, and Walton (2009) are critical that reporting only reflects rhetorical claims of action maintaining that businesses are ‘doing’ sustainability. When businesses portray ‘sustainability as a journey’ in corporate disclosures, they may effectively mask their narrow and mainly economic-focused approach to the natural environment, thereby distancing themselves from actual engagement with society (Milne, Kearins, & Walton, 2006). Tregidga and Milne (2006) make a similar comment about business management focusing on resource efficiency while using the sustainable development movement to position themselves as leaders of ‘doing’ or ‘delivering’ sustainability (p. 225). This reinforces business-as-usual practices and limits the ability of organisations to question key sustainability activities, and to link ‘small wins’ achieved by environmental disclosure to strategising (Mitchell, Curtis, & Davidson, 2012). Phillips (2013) also suggests that ecopreneurs may use narratives to achieve a coherent sense of self-identity, which could reconcile a deep conflict between the environment (value) and business (value). Even in the process of incorporating triple-bottom-line performance indicators into reporting processes, Milne and Gray (2013) argue that the concern for ecology could be sidelined, thereby causing greater levels of unsustainability. Following the legitimacy logic and associated critical views, little or no changes in carbon performance can be expected as a result of disclosure changes. Despite the fact that empirical studies have thus far focused on ‘levels’ analyses of carbon disclosure and performance at a given time, the rationale and assumption used in prior studies provide insightful implications. According to this line of thinking, increasing disclosures is viewed as an approach to portray sustainable images (Milne et al., 2006; 2009) or repair adverse images in order to obtain or maintain legitimacy (O'Donovan, 2002; Patten, 2015). In this case, no real performance will be achieved, especially for better performers, as they have no incentive to improve further. Therefore, based on the legitimacy perspective, a null hypothesis can be formulated as: H0: Changes in carbon disclosure will not make any significant difference to carbon performance. Please cite this article in press as: Qian, W., & Schaltegger, S., Revisiting carbon disclosure and performance: Legitimacy and management views, The British Accounting Review (2017), http://dx.doi.org/10.1016/j.bar.2017.05.005

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2.2. Disclose to performdfollowing an ‘outside-in’ management view Following the management-orientated view of environmental disclosure, stakeholder dialogues and reporting in response to public demands are considered potentially useful in helping companies develop their measurement and management activities, and can subsequently drive improvement in corporate sustainability performance (Burritt & Schaltegger, 2010). Schaltegger and Wagner (2006) define this approach as an ‘outside-in’ approach to corporate sustainability. From the outsidein view, communication with stakeholders can help companies scan expectations and derive performance measures and accounting approaches (Schaltegger & Wagner, 2006). The outside-in approach regards social and environmental disclosure as a tool to assist managers to communicate the need to improve corporate performance inside the organisation (Burritt & Schaltegger, 2010). In this view, the process of environmental disclosure can support the ‘infiltration’ of stakeholder norms and expectations into companies in order to drive change and performance improvement (Boons & Strannegard, 2000). For example, Salo's (2008) empirical analysis of corporate governance and environmental performance shows that when companies disclose non-financial performance information, managers are likely to become increasingly concerned with managing those revealed performance areas (Burritt & Schaltegger, 2010; Clarkson et al., 2008). The ‘outside-in’ management view presents a different line of thinking, with different implications from the legitimacy view. It contends that although companies may initially react in response to public pressures and information demands, environmental disclosure and sustainability reporting may nevertheless create an opportunity to influence decision making and provide motivation for companies to perform better (Burritt & Schaltegger, 2010; Schaltegger & Burritt, 2005). Previous studies find that better performing firms are likely to have more ‘good news’ to disclose, while poorer performers may have difficulty copying their performancedthat is, mimicry is made difficult and competitive advantage can be secured (Bewley & Li, 2000; Clarkson et al., 2008; Li, Richardson, & Thornton, 1997). This suggests that disclosure could be an approach for companies to create momentum in the organisation to improve, signal improved social and environmental performance (Branco & Rodrigues, 2006), create value and benefit (including enhancing images and reputation) (Hoogiemstra, 2000), distinguish themselves from competitors in global competitions (Hasseldine, Salama, & Toms, 2005) and influence firm ~ oz, 2014). In this regard, pressure to valuation (Clarkson, Li, Pinnuck, & Richardson, 2015; Matsumura, Prakash, & Vera-Mun increase environmental disclosure quality and scope could drive corporate commitment to sustainability and improvement in environmental performance (Al-Tuwaijri et al., 2004; Clarkson et al., 2008; Schaltegger & Csutora, 2012). However, thus far, little empirical evidence has been attained on disclosure changes in individual firms and the effects of these changes on environmental performance improvements over time. Unlike many other environmental issues, which are either less visible or hardly measurable, carbon emissions have received much attention recently and have increasingly infiltrated management concepts and practice. In many countries, carbon emissions have been monetised and visible to individual organisations (Vesty, Telgenkamp, & Roscoe, 2015). As Topping (2011) reiterates, given the increasing demand of carbon information within and outside the boundaries of business operations, the process of carbon disclosure can and should lead to changes in corporate carbon management behaviour and performance. It is expected that what gets measured will get managed; thus, disclosure of figures on carbon and environmental performance is likely to cause valuable and constructive change in strategic thinking which enables companies to convert data into action (Schaltegger & Wagner, 2006; Topping, 2011). Therefore, from the outside-in view, we propose a contrasting hypothesis as follows: H1: Changes in carbon disclosure will lead to positive changes in carbon performance.

3. Research method 3.1. Sample The analysis is based on carbon emission information collected from the CDP for the years 2008e2012. Panel data are used to control for unobservable firm heterogeneities so that the hypotheses can be better tested. The CDP has created the largest registry of corporate greenhouse gas emission data for the world's largest publicly listed corporations since 2000. Despite receiving limited attention upon its initiation, the CDP has now engaged with hundreds of large institutional investors globally to urge corporations to extensively disclose carbon-related information (CDP, 2012). Moreover, CDP data are increasingly used in environmental and sustainability research, such as in Dawkins and Fraas (2011b), Kim and Lyon (2011), and Luo, Lan, and Tang (2012), among others. We use Global Fortune 500 companies in the CDP to conduct the analysis. Our focus on the largest companies is justified by their public visibility, their (perceived) leading role in responding to climate change and their importance for the global economy. However, data before 2008 are excluded because carbon emission information prior to 2008 is limited in its scope and the number of companies covered, which may constrain the comparability of data between years. Thus, to maintain consistency and obtain as much information as possible, we use CDP data from 2008 to 2012. During this period, the urgency to manage climate change has been gradually realised by business managers because market incentive schemes such as the European Union ETS have been put in place to encourage corporate carbon management activities and innovation (Egenhofer, € risch, 2013). 2007; Engels, 2009; Ho Please cite this article in press as: Qian, W., & Schaltegger, S., Revisiting carbon disclosure and performance: Legitimacy and management views, The British Accounting Review (2017), http://dx.doi.org/10.1016/j.bar.2017.05.005

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Company financial information is sourced from the Osiris database which contains detailed information on all listed companies around the world. For the purpose of this study, companies are selected if they: (1) did not experience merger and acquisition that led to changes in the name or industry during the study periods, (2) are included as a top 500 company in both the CDP Global 500 and Osiris financial database, and (3) have released carbon emission information to the CDP and have financial information available from Osiris. This provides us an initial sample of 439 companies. As this study requires change measures of the variables and needs to analyse the lagged effect, we only include companies that contain three or more consecutive years of information to allow such analysis. This reduces our sample to 284 companies (1052 firm-year observations). After using the change measures, we obtain 766 observations in total, including 154 observations from the period 2008e2009, 173 observations from 2009 to 2010, 234 observations from 2010 to 2011 and 205 observations from 2011 to 2012.

3.2. Model and measurement Carbon performance is measured as actual carbon emission intensity, using the emission data reported in the CDP scaled by firms' sales revenue. This study focuses on two measures of carbon performance: (1) the totals of corporate carbon emissions, i.e. the sum of direct/Scope 1 CO2 emissions2 and indirect/Scope 2 CO2 emissions3; and (2) the standalone direct/ Scope 1 CO2 emissions. The reason for using total CO2 emissions as an overall indicator of carbon performance is that both emissions are considered an indispensable part of corporate carbon responsibility and management. However, we also include Scope 1 emissions as a separate indicator of carbon performance because on a company basis only Scope 1 emissions are regulated and included in current ETS (e.g. Matsumura et al., 2014). Carbon emissions are scaled by sales revenue in thousands at the end of the year to obtain carbon emission intensity, i.e. each measure reflects a firm's carbon emissions per thousand US dollars of sales. This is consistent with a number of previous studies (e.g. Cho & Patten, 2007; Clarkson, Li et al., 2011; Patten, 2002). Since carbon emission intensity reflects a firm's pollution level, the actual carbon performance should be read as the inverse of emission intensity. To facilitate the interpretation of carbon performance, when we calculate the changes of carbon emission intensity (calculation of DTotal emission intensity and DScope 1 emission intensity), we have reversed the sign of these variables d that is, the larger these measures are, the better the carbon performance of the firm. We use carbon disclosure scores reported by the CDP as the primary measure of carbon disclosure (CD) for this study. According to the CDP, the quality of carbon disclosure is based on the comprehensiveness of reporting on the: (1) general risks and opportunities of climate change; (2) effect of existing and future carbon emission regulations; (3) physical risk of climate change; (4) innovations developed in response to climate change; (5) management group or personnel responsible for climate change; (6) quantitative emission levels; (7) emissions associated with products, services and supply chains; (8) emission reduction strategy and investment; (9) strategies for emission trading and (10) energy consumption and costs. These categories of disclosure scores are consistently adopted for all years in the study period. To use percentage changes of disclosure scores for better interpretation in the empirical model, we divide CDP reported scores (range from 0 to 100) by 100. For example, if the reported disclosure score in the preceding year is 68 and the following year is 75, our measures of CD in those two years are 0.68 (68%) and 0.75 (75%), respectively, and our measure for the change in carbon disclosure (DCarbon disclosure) is the difference between 0.75 and 0.68 d that is, 0.07 or 7%. We control for a number of other factors that the prior literature has linked to corporate environmental disclosure and/or performance. The changes of these variables are calculated accordingly. Firm size has been used as a control variable in many previous studies of environmental disclosure (e.g. Clarkson, Overell et al., 2011; Deegan & Gordon, 1996; Patten, 2002). It has been argued that larger companies are subject to higher political and regulatory pressures, and thus higher political costs € ller, & Verbeeten, 2011). To reduce political cost, larger companies may have more incentives to perform (Gamerschlag, Mo better and disclose more. Clarkson, Li et al. (2011) further suggest that firms that are well positioned are more likely to invest in clean technology to improve environmental performance. In this study, we control for firm size using the natural logarithm of total assets. A firm's financial resources in prior periods may affect its social and environmental performance. Previous empirical studies have reported a positive relationship between financial performance and environmental performance (Wahba, 2008), social performance (Spicer, 1978; Waddock & Graves, 1997), corporate social responsibility (Schnietz & Epstein, 2005) and corporate sustainability (Lo & Sheu, 2007). The positive link is favoured by the business community and practitioners because it suggests that both the interests of shareholders and other stakeholders could be mutually satisfied if sustainability is managed well. Consistent with prior studies (e.g. King & Lenox, 2001; Nakao, Amano, Matsumura, Genba, & Nakano, 2007), financial performance is measured as return on assets (ROA). Other financial factors that have been linked with environmental disclosure or performance include financial risk (leverage) and liquidity. Financial risk has been recorded as a significant determinant of corporate decisions to make

2 Scope 1 emissions refer to the release of greenhouse gases into the atmosphere as a direct result of an activity or series of activities that constitute the facility. An example is the gases emitted by burning coal to generate electricity at an electricity production facility (a power station). 3 Scope 2 emissions refer to the release of greenhouse gases emitted at another company or a second facility because of the electricity, heating, cooling or steam that is consumed at the facility. An example is Scope 2 emissions in a car factory because of its purchase and use of electricity for lighting, as greenhouse gas is emitted when generating such electricity.

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environmental investment or change environmental strategy (Clarkson, Li et al., 2011). Corporations are more likely to monitor demand for information when their leverage levels increase (de Villiers, Naiker, & van Staden, 2011). Financial risk is measured as total debt divided by total assets at fiscal year-end. Liquidity, reflecting the ability of a firm to meet its financial obligations, is expected to positively influence the firm's environmental strategy. Liquid firms with adequate cash flows are more likely to allocate resources to large environmental projects, accommodate environmental compliance costs and improve environmental performance (de Villiers et al., 2011). Consistent with Clarkson, Li et al. (2011), we measure liquidity as the net cash flow from operations divided by the beginning period total assets. A firm's management capability and efficiency also reflect its ability and willingness to invest in environmental issues. This is because greater management capability is more likely to pursue proactive long-term investment strategies (Sharma & Vredenburg, 1998). Sales growth has been used to represent management talent or capability to create financial value (King & Lenox, 2001) and improve environmental performance (de Villiers et al., 2011). Sales growth in this study is measured as changes in sales divided by beginning period sales. Likewise, asset newness is often included in predicting environmental strategies. As Clarkson, Li et al. (2011) explain, firms with newer equipment are likely to employ cleaner and less polluting technologies, and subsequently likely to achieve better environmental performance. We calculate asset newness as the ratio of net property, plant and equipment (PPE) to gross PPE at the fiscal year-end. Capital intensity is another indicator measuring the efficiency of a firm in deployment of its assets. It reflects the total capital needed to maintain production and generate revenue. Capital intensity is frequently used to predict financial performance (King & Lenox, 2001) as well as environmental performance (Clarkson et al., 2008). As Clarkson et al. (2008) argue, firms with higher capital spending are likely to invest more in environmental matters and thereby achieve higher environmental performance. To control this variable, capital intensity in this study is measured as the ratio of capital expenditures to total sales revenue at fiscal year-end (Clarkson, Li et al., 2011; de Villiers et al., 2011). Another factor reflecting a firm's management innovation is research and development (R&D) intensity. Clarkson, Li et al. (2011) argue that an innovative management team is more likely to pursue proactive investment strategies, including environmental investment strategies. R&D intensity, as a proxy for innovation, is often controlled for financial performance (King & Lenox, 2001) and environmental performance (de Villiers et al., 2011). R&D intensity is measured as total R&D expenses divided by total assets. It is also acknowledged that carbon pollution and associated risks may be more relevant in some industries than others. High energy-intensive industries have greater environmental exposure and sensitivity; thus, they are usually under closer public scrutiny and are subject to higher political costs (Cho & Patten, 2007; Cho, Patten, & Roberts, 2006). Kolk's (2010) investigation of sustainability reporting by 250 world-leading companies highlights that high polluting industry sectors, such as chemicals, oil and gas, have more consistent reporters than other industries. In the public eye, firms with high environmental sensitivity should bear most environmental costs and take more responsibility to improve their environmental performance. To reflect this public interest, we include environmental exposure as a dummy variable, with high environmentally-exposed industries coded ‘1’ and the rest coded ‘0’. In this study, high-exposure industries include materials (such as chemicals, construction materials, metals and mining, and paper), energy (such as oil and gas drilling and exploration) and utilities (such as electric, gas and water utilities), which are commonly considered high environmentally-sensitive industry sectors (e.g. Deegan & Gordon, 1996). Table 1 summarises the variables examined in this study. Based on the relationship between carbon performance and disclosure changes discussed previously, we estimate the following two models:

DTotal emission intensityi;tþ1 ¼ bi þ b1 DCarbon disclosurei;t þ b2 DFirm sizei;t þ b3 DROAi;t þb4 DFinancial riski;t þ b5 DLiquidityi;t þ b6 DSales growthi;t þb7 DAsset newnessi;t þ b8 DCapital intensityi;t þ b9 DR&D intensityi;t þ b10 DEnvironmental exposure þ εi;t DScope 1 emission intensityi;tþ1 ¼ bi þ b1 DCarbon disclosurei;t þ b2 DFirm sizei;t þ b3 DROAi;t þb4 DFinancial riski;t þ b5 DLiquidityi;t þ b6 DSales growthi;t þb7 DAsset newnessi;t þ b8 DCapital intensityi;t þ b9 DR&D intensityi;t þ b10 DEnvironmental exposure þ εi;t

In the above models, the dependent variables DTotal emission intensityi,tþ1 and DScope 1 emission intensityi,tþ1 represent the changes in total emission intensity and Scope 1 emission intensity for company i in year tþ1 respectively. DCarbon disclosurei,t is the change in carbon disclosure level of company i in year t. The lead-lag method is used because the changes in carbon performance (if there are any) are likely to lag behind the changes in carbon disclosure and economic variables. Analysing one-year lagged changes in carbon disclosure may provide a better explanation of whether decreased or increased carbon disclosure (leading) in a preceding year can lead to decreased or improved carbon performance (lagging) in a subsequent year. Due to using the lead-lag relationship analysis for our model prediction, the five-year panel data effectively generates a four-time-period change analysis. All control variables except environmental exposure capture the changes of the variables discussed above. bi are scalar constants representing the effects of omitted variables that are specific to the ith company, while ε i,t is the error term. Please cite this article in press as: Qian, W., & Schaltegger, S., Revisiting carbon disclosure and performance: Legitimacy and management views, The British Accounting Review (2017), http://dx.doi.org/10.1016/j.bar.2017.05.005

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Table 1 Summary of variable measurements. Variable

Measurement

Total emission intensity Scope 1 emission intensity Carbon disclosure Firm size ROA Financial risk Liquidity Sales growth Asset newness Capital intensity R&D intensity Environmental exposure

Total (Scope 1 and Scope 2) carbon emissions divided by total revenue in thousands of US dollars. In calculating DTotal emission intensity, the sign is inversed to reflect the change of performance. Scope 1 (direct) carbon emissions divided by total revenue in thousands of US dollars. In calculating DScope 1 emission intensity, the sign is inversed to reflect the change of performance. Carbon disclosure scores, based on 10 indices assessing the comprehensiveness of reporting. Natural logarithm of total assets. Return on assets, measured as earnings before interest and tax, divided by average assets. Debt ratio measured as total debt divided by total assets. Net cash flow from operations divided by total assets. Changes in sales revenue divided by the beginning period sales revenue. Net property, plant and equipment (PPE) divided by gross PPE at the year-end. Capital expenditures divided by total revenue. Total R&D expenditures divided by total assets. ‘1’ for high environmentally-exposed industries and ‘0’ for the rest.

We note that unlike other testing variables in the panel estimation, environmental exposure as a dummy does not capture changes between years. This may affect its explanatory power in our change model. Hence, in addition to the overall model estimates, we have further examined the change association between carbon disclosure and performance in high-exposure industries. The results of this specific examination are presented after the main model test in Section 4. 4. Results We first summarise the overall carbon disclosure and performance profile for firms studied during the time period of 2008e2012. Table 2 indicates that the average total emission intensity is 0.516, which means that on average the sample firms generate 0.516 tonnes of total carbon emissions per thousand dollars of sales revenue. The average Scope 1 emission intensity is slightly lower, with a mean (median) value of 0.448 (0.025). While carbon prices vary between regions and over time (e.g. in Europe, the price fluctuated from as high as $36 [V30] per tonne to as low as $12 [V10] per tonne during the sample periods), higher total and Scope 1 carbon emissions would result in additional cost for every dollar of sales a company generates. The market loss could be even higher. Matsumura et al. (2014) observe the negative effect of carbon emissions on firm value and highlight that for every additional tonne of carbon emissions, a company's market value could drop by over $200. However, these market prices and market values do not consider the risks and costs of carbon emissions to society. As revealed by Ackerman and Stanton (2011), every tonne of carbon emissions could produce up to $893 of economic damage if social and environmental costs are monetised and internalised. They also warn that by 2050 these social costs could increase to $1550 per tonne of carbon emissions. The average carbon disclosure value is 0.69 over the five years studied, with a close median value of 0.71. If ‘1’ represents full disclosure and any disclosure score below 0.5 represents poor disclosure, an average value of 0.69 seems to suggest a generally moderate level of carbon disclosure by the world's largest companies. The minimum carbon disclosure value is 0.02 d almost equivalent to no disclosure. In contrast, several companies have consistently achieved full disclosure scores (maximum 1 or 100%). The inter-quartile range of 0.58e0.83 does not seem to exhibit a wide dispersion of disclosure levels. Table 3 presents the descriptive statistics of the change variables included in the estimation. The results reveal that the inversely recorded DTotal emission intensity and DScope 1 emission intensity as reflecting carbon performance have positive mean values of 0.016 and 0.011 respectively, indicating that the average decreases of total and Scope 1 carbon emissions are 0.016 tonne (16 kg) and 0.011 tonne (11 kg) per thousand dollars of revenue earned. Despite the somewhat smaller middle value of the two carbon performance indicators (0.004 tons for DTotal emission intensity and 0.001 tons for DScope 1 emission Table 2 Summary of overall corporate carbon profile. Descriptive stats

Total emission intensity

Scope 1 emission intensity

Carbon disclosure scores

Mean Median Std. dev. Min. Max. Q1 Q3 N ¼ 284 firms Observations ¼ 1052

0.516 0.067 1.208 0.000 11.077 0.027 0.438

0.448 0.025 1.172 0.000 11.077 0.006 0.325

0.690 0.710 0.178 0.020 1.000 0.580 0.830

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Table 3 Descriptive statistics for firms from the period 2008e2012. Variable

Mean

Median

Std. dev.

Q1

Q3

DTotal emission intensity () DScope 1 emission intensity () DCarbon disclosure DFirm size DROA DFinancial risk DLiquidity DSales growth DAsset newness DCapital intensity DR&D intensity

0.016 0.011 0.040 0.061 0.003 0.001 0.003 0.014 0.001 0.010 0.000

0.004 0.001 0.030 0.048 0.001 0.003 0.003 0.017 0.005 0.001 0.000

0.291 0.253 0.154 0.152 0.065 0.063 0.051 0.294 0.261 0.227 0.012

0.001 0.002 0.050 0.007 0.021 0.025 0.021 0.128 0.073 0.039 0.001

0.015 0.009 0.110 0.112 0.018 0.019 0.017 0.099 0.084 0.033 0.002

N ¼ 284 firms Observations ¼ 766

intensity), the general movement of carbon performance over the five-year study period is encouraging. The mean value of Dcarbon disclosure over the five-year period is 0.04. This means that on average firms increase their carbon disclosure scores by 4 (out of 100) per year, suggesting that firms have made progress to improve their carbon disclosure quality over the sample period. The median of DCarbon disclosure is 0.03, close in value to the mean, again confirming the slow yet continuous improvement of disclosure by the world's largest corporations since carbon pollution took centre stage in public debate. Firms have begun to take action effectively and reduce carbon emissions steadily. However, the diverse feature presented in these two indicators is still notable (for example, the negative results of the first quartile changes). This may imply there has not been consistent improvement across the board. In comparison to carbon-related factors, the financial characteristics of firms present slightly different readings. Despite the fact that firms have generally increased in size over the five-year sample period, their average financial performance and risk levels remain stable. For example, the mean value of DROA is 0.003 (0.3%) and its median approximates to zero. The first quartile firms, which are placed at the lower end of the performance category, have a negative DROA of 0.021 (2.1%). This is in contrast to the top quartile firms which obtain an average DROA of 0.018 (1.8%). Likewise, the average changes of firms' leverage level (DFinancial risk and DLiquidity) exhibit similar features and diversity. The mean (median) DSales growth is 0.014 (0.017), indicating that on average changes in sales growth are negative. However, firms are somewhat varied in terms of changes in growth, as the inter-quartile range of these changes expands from 0.128 (12.8%) to 0.099 (9.9%). DAsset newness has a mean value of 0.001 and a slightly higher median of 0.005. The relatively small figures seem to suggest that there have been no major changes or upgrade of the firms' major property plant and equipment between 2008 and 2012. The steady values of DCapital intensity and DR&D intensity confirm these results. The mean (median) of DCapital intensity is 0.010 (0.001) and its inter-quartile range is from 0.039 to 0.033. Firms present little variation in DR&D intensity. Both the mean and median of DR&D intensity are close to zero, with a small inter-quartile range of 0.001 to 0.002. We also examine the correlation between the variables. The results of the correlation tests are shown in Table 4. For most change variables used in the estimation, moderate to low correlations are observed. DCarbon disclosure is correlated with carbon performance indicators. Its association with other financial variables, such as DROA, Dsales growth and DR&D intensity, is moderate. As expected, the association between DTotal emission intensity and DScope 1 emission intensity is relatively high because of their overlaps in measuring Scope 1 emissions. However, as previously explained, the differences in regulatory requirement and responsibility scopes and levels, particularly for high environmentally-sensitive firms, warrant a separate examination of these two performance indicators. Among the control variables, some correlations are exhibited between variables such as DFirm size, DSales growth, DFinancial risk and DCapital intensity. However, there is no consistent multicollinearity issue observed in the results. Table 5 presents the empirical results of the relationship between changes in carbon disclosure and changes in performance. We undertake both fixed and random effect estimations for the five-year panel data. Although the Hausman test is sometimes used to select which estimation is more appropriate, the test has been criticised for its problematic assumptions in comparing fixed and random effects (Wooldridge, 2002). Taking this into consideration, we apply both effects to minimise biased selection. As discussed earlier, carbon performance in this study has been inversely calculated and presented. Thus, an improvement of carbon performance is interpreted as a reduction of carbon emission intensity. Overall, the results support the ‘outside-in’ management view of the effect of carbon disclosure change on carbon performance change. It is revealed that, for every 1% (DCarbon disclosure ¼ 0.01) improvement of carbon disclosure scores, there has been a reduction of around 1.82 kg of total emissions and 1.48 kg of Scope 1 emissions per thousand dollars of sales revenue in the subsequent year. These results support H1, which states that changes in carbon disclosure would lead to positive changes in carbon performance. To illustrate, the statistics show that DCarbon disclosure is significantly associated with the subsequent DTotal emission intensity under both random (b1 ¼ 0.182, p ¼ 0.021) and fixed (b1 ¼ 0.226, p ¼ 0.030) effect estimations. DScope 1 emission intensity is also consistently influenced by carbon disclosure changes in the random (b1 ¼ 0.148, p ¼ 0.031) and fixed (b1 ¼ 0.189, p ¼ 0.049) effect tests. These findings confirm that, regardless of whether

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Table 4 Pearson correlation statistics for variables used in the estimation. Variable

DTotal emission intensity () DScope 1 emission intensity () DFirm size

DROA DFinancial risk DLiquidity DSales growth DAsset newness DCapital intensity DR&D intensity

DCarbon D Total emission disc. intensity () 0.218 (0.005) 0.196 (0.009) 0.065 (0.101) 0.097 (0.059) 0.037 (0.204) 0.011 (0.426) 0.143 (0.018) 0.020 (0.369) 0.029 (0.348) 0.102 (0.053)

0.841 (0.000) 0.285 (0.001) 0.078 (0.070) 0.031 (0.255) 0.096 (0.060) 0.264 (0.001) 0.051 (0.127) 0.112 (0.033) 0.021 (0.346)

D Scope 1 emission

DFirm DROA DFinancial DLiquidity DSales

DAsset

intensity ()

size

growth

newness

DCapital intensity

0.322 (0.000) 0.049 (0.157) 0.042 (0.158) 0.124 (0.025) 0.255 (0.001) 0.066 (0.114) 0.120 (0.020) 0.014 (0.408)

0.102 (0.055) 0.109 (0.050) 0.115 (0.031) 0.236 (0.002) 0.035 (0.252) 0.136 (0.014) 0.027 (0.355)

0.149 (0.024) 0.187 (0.011) 0.121 (0.029)

0.152 (0.020) 0.009 (0.724)

0.118 (0.030)

risk

0.188 (0.011) 0.008 (0.604) 0.121 (0.025) 0.011 (0.448) 0.132 (0.015) 0.005 (0.797)

0.152 (0.019) 0.038 (0.211) 0.124 (0.022) 0.072 (0.113) 0.013 (0.425)

0.119 (0.030) 0.083 (0.066) 0.099 (0.064) 0.155 (0.023)

The level of significance is given in brackets. Significant coefficients (p < 0.1) are highlighted in italics.

disclosure has been used to legitimise prior performance (see Cho et al., 2012; Patten, 2002), once companies improve their carbon disclosures, they will subsequently create real change and actual improvement of carbon performance will follow. In addition, variables such as DFirm size, DSales growth, DCapital intensity and DLiquidity exert significant influence on subsequent changes in total and/or Scope 1 emission intensity. As can be seen, DSales growth is strongly associated with a change in carbon performance, with all of its significance levels below 1%. This suggests that maintaining a positive sales growth rate goes alongside driving a reduction in carbon emission intensity. This may indicate that economically successful companies tend to improve their carbon performance. DCapital intensity is revealed as a significant variable contributing to changes in both carbon intensities in the random but not fixed effect tests. The respective coefficients (p-values) are 0.163 (0.070) in random model (1) and 0.185 (0.056) in random model (3), thereby indicating that companies with increasing capital spending are relatively more capable of effectively managing their carbon performance. DLiquidity is only significantly associated with changes in the Scope 1 emission intensity. They are both significant at 10% levels. Other financial variables previously proposed as potential drivers for carbon performance management are not found to be significant in this study. The empirical results presented in Table 4 are based on a total of 284 sample firms (283 in Scope 1 intensity tests) containing matched changes of both carbon disclosure and performance in consecutive years. The test statistics of the models are all significant, with overall adjusted R2 of around 20% (ranging from 19.9% to 23.2%). We then take a further look at the sample of high environmentally-exposed industries. The influence of environmental exposure on carbon performance changes is limited in the overall sample estimation. As noted earlier, part of the reason for this limited effect may have stemmed from the panel estimation itself, as change analysis and the lagged effect are not applicable to environmental exposure. A closer examination of high environmentally-exposed firms increases the validity of our analysis. The focus on high-exposure firms reduces the data from the overall sample of 284 firms to 102 firms for five years. Table 6 presents the empirical results of the association between changes in disclosure and performance in high environmentally-exposed firms. In contrast to the consistent findings of carbon disclosure and emission intensity levels in Table 5, Table 6 reports some mixed results. Although DCarbon disclosure does provide a positive stimulus for subsequent DTotal emission intensity, this stimulus is moderately significant. The results show that the coefficients (p-values) are 0.446 (0.071) in the random and 0.659 (0.085) in the fixed effect estimations for DTotal emission intensity. Compared with the overall results in Table 5, high environmentally-exposed firms seem to reduce total emission intensity for every 1% improvement of carbon disclosure to a larger extent. Thus, the ‘outside-in’ management view is to some extent supported. However, the support for the association between DCarbon disclosure and DScope 1 emission intensity is rather weak. The significance level of random model (3) is at the 10% level and the fixed model (4) shows no significant relationship between the two. The legitimacy view is somewhat supported. Combining these findings, two hypotheses are partially supported by the test results for high environmentally-exposed industries. While the high-exposure firms which improve their carbon disclosure still tend to improve their carbon performance, the positive link is not strong, particularly for the reduction of Scope 1 emissions. The previous literature has indicated that heavy polluters are more likely to be threatened by breach of social legitimacy; thus, they are more willing and motivated to disclose more information in order to maintain or achieve social legitimacy (Cho & Patten, 2007). The results of this study seem to suggest that the motivation to implement more carbon reporting initiatives has not yet driven heavy emitters to Please cite this article in press as: Qian, W., & Schaltegger, S., Revisiting carbon disclosure and performance: Legitimacy and management views, The British Accounting Review (2017), http://dx.doi.org/10.1016/j.bar.2017.05.005

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Table 5 Changes in carbon disclosure leading to changes in carbon performance. Variable

Intercept

DCarbon disclosure DFirm size DROA DFinancial risk DLiquidity DSales growth DAsset newness DCapital intensity DR&D intensity Environmental exposure Wald Chi2

DTotal emission intensitytþ1 DTotal emission intensitytþ1 DScope 1 emission intensitytþ1 DScope 1 emission intensitytþ1 () (1) Random

() (2) Fixed

() (3) Random

() (4) Fixed

0.010 (0.585) 0.182 (0.021) 0.435 (0.001) 0.325 (0.397) 0.162 (0.853) 0.336 (0.288) 0.412 (0.000) 0.043 (0.509) 0.163 (0.070) 1.397 (0.546) 0.018 (0.504) 67.230 (0.000)

0.005 (0.825) 0.226 (0.030) 0.675 (0.000) 0.296 (0.367) 0.155 (0.680) 0.367 (0.256) 0.426 (0.000) 0.096 (0.217) 0.123 (0.348) 0.870 (0.795)

0.011 (0.469) 0.148 (0.031) 0.499 (0.001) 0.337 (0.448) 0.079 (0.829) 0.532 (0.090) 0.363 (0.000) 0.042 (0.463) 0.185 (0.056) 0.757 (0.703) 0.013 (0.577) 77.150 (0.000)

0.009 (0.914) 0.189 (0.049) 0.716 (0.000) 0.366 (0.279) 0.075 (0.794) 0.588 (0.096) 0.378 (0.000) 0.023 (0.752) 0.210 (0.169) 0.622 (0.883)

F-Stat R-sq N Observations

19.9% 284 766

4.890 (0.000) 21.0% 284 766

23.2% 283 764

5.680 (0.000) 22.4% 283 764

The level of significance is given in brackets. Significant coefficients (p < 0.1) are highlighted in bold italics.

prepare better for carbon performance challenges than less heavy emitters. This may echo some implications from Frost and Wilmshurst (2000) which underpin that environmentally-sensitive industries, such as mining and resources, chemical and petroleum (gas/oil) businesses, tend to report more environmental information and are more aware of environmental costs, but their environmental management control procedures are not significantly different from other industries, which may have limited their scope and scale of actual performance improvement. The results imply that, for high environmentallyexposed firms, carbon disclosure plays a mixed role, as it has not only been used as a ‘management’ device to transfer external pressure to internal change, but also as a ‘legitimation’ tool to fill in legitimacy gaps, without engaging much performance change. Other variables exhibit similar significance as previous results. DSales growth is strongly (p < 1%) associated with all performance changes, which aligns with the previous message that an increasing sales growth rate goes alongside carbon performance improvement in highly exposed firms. This may be because firms with accelerating sales revenue have more resources and capabilities to invest in carbon management projects, which then enhance their carbon performance. The positive effect of DCapital intensity on carbon performance is clear, with three of four tests showing significant results. The effect of DCapital intensity seems stronger on DScope 1 emission intensity (p ¼ 0.008 in random and p ¼ 0.076 in fixed estimations) than on DTotal emission intensity (p ¼ 0.039 in random and p ¼ 0.232 in fixed estimations). DLiquidity is also revealed as a significant contributor to DScope 1 emission intensity, but again not to DTotal emission intensity. The models presented are significant, with adjusted R2 ranging from 28.2% to 36.1%, relatively higher model fits than the previous results. 5. Conclusion This study is undertaken in response to the increase of carbon disclosure but the dearth of research on whether this increase can be transformed into change in carbon performance. Despite much research on the relationship between environmental performance and disclosure, little evidence has focused on the actions and changes corporations may take following disclosures. This is a more critical question than which businesses disclose or why they disclose because it relates to a fundamental issue of whether companies improve performance as a result of disclosure changes. No previous study has directly examined this question, although two competing views on how companies disclose to perform (or not perform) have provided different insights. From the legitimacy perspective, businesses are regarded as adaptive entities reacting to social pressures relating to environmental challenges, such as climate change. Carbon disclosure is thus posited as a legitimising tool Please cite this article in press as: Qian, W., & Schaltegger, S., Revisiting carbon disclosure and performance: Legitimacy and management views, The British Accounting Review (2017), http://dx.doi.org/10.1016/j.bar.2017.05.005

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Table 6 Changes in carbon disclosure leading to changes in carbon performance in high environmentally-exposed industries. Variable

DTotal emission intensitytþ1 () (1) Random

0.015 (0.653) DCarbon 0.446 disclosure (0.071) DFirm size 0.308 (0.002) DROA 0.377 (0.509) DFinancial risk 0.078 (0.948) DLiquidity 1.356 (0.130) DSales growth 0.539 (0.000) DAsset newness 0.032 (0.695) DCapital intensity 0.776 (0.039) DR&D intensity 14.053 (0.389) Wald Chi2 45.180 (0.000) F-Stat Intercept

R-sq N Observations

31.5% 102 275

DTotal emission intensitytþ1 () (2) Fixed

DScope 1 emission intensitytþ1

0.003 (0.959) 0.659 (0.085) 0.494 (0.000) 0.315 (0.584) 0.894 (0.518) 1.192 (0.285) 0.587 (0.002) 0.122 (0.378) 0.625 (0.232) 9.824 (0.588)

0.022 (0.572) 0.328 (0.099) 0.452 (0.001) 0.485 (0.380) 0.065 (0.539) 1.814 (0.016) 0.460 (0.000) 0.031 (0.808) 0.767 (0.008) 14.795 (0.250) 56.640 (0.000)

2.610 (0.008) 28.2% 102 275

() (3) Random

36.1% 102 275

DScope 1 emission intensitytþ1 () (4) Fixed 0.012 (0.811) 0.386 (0.179) 0.560 (0.000) 0.228 (0.672) 0.161 (0.467) 1.766 (0.045) 0.472 (0.001) 0.044 (0.735) 0.731 (0.076) 12.203 (0.462)

3.630 (0.002) 35.6% 102 275

The level of significance is given in brackets. Significant coefficients (p < 0.1) are highlighted in bold italics.

that is unable to result in any real improvement of environmental performance. The ‘outside-in’ management view conjectures a different relationship. It takes the perspective that businesses can act proactively when facing environmental challenges. Thus, according to this view, carbon disclosure can be used as a catalyst to drive changes in organisations to achieve actual carbon performance improvement. Through a change analysis of Global 500 companies and their carbon emission and disclosure data released during 2008 and 2012, this study finds an average (median) reduction of 16 kg (four kilograms) of total carbon emissions and 11 kg (one kilogram) of Scope 1 emissions per thousand US dollars of sales revenue generated each year. Empirically, the study finds that the ‘outside-in’ management view is largely supported. The results indicate that changes in carbon disclosure levels are positively associated with subsequent changes in carbon performance, which is examined through the total and Scope 1 carbon emission intensities. Our empirical results divulge a positive role of disclosure changes. We find that a 1% improvement in carbon disclosure (i.e. increase score of 1 out of 100) has led to a reduction of 1.82 kg of total and 1.48 kg of Scope 1 carbon emissions per thousand dollars of sales revenue earned. For most large firms with over $10 billion (many with over $100 billion) in annual sales revenue, a 1% increase of disclosure score could lead to a reduction of nearly 20,000 tonnes of total emissions and 15,000 tonnes of Scope 1 direction emissions per annum. These improvements could potentially save companies millions of dollars in the capital market and reduce tens of millions of dollars of damage to society and the environment. The findings of this research imply that if carbon disclosure improves, firms are motivated and capable of using disclosure as an ‘outside-in’ opportunity to create change and improve their carbon performance. This progresses the debate prevailing in the extant literature, such as whether disclosure is a justification for poor carbon performance, or which companies are keener to disclose carbon information (e.g. Font et al., 2012; Hughes et al., 2001; Luo & Tang, 2014). Whether companies make an actual change following disclosure is more critical to stakeholders and the natural environment. The findings of an ‘outside-in’ opportunity in change and value creation go beyond the previous debate based merely on level analysis of the association between disclosure and performance. However, this study also reveals that the ‘outside-in’ perspective is less strong and significant for high environmentally-exposed firms and heavy polluters. This is reflected in their positive yet relatively weaker association between changes in carbon disclosure and subsequent carbon performance, particularly subsequent Scope 1 emission intensity. We believe that the results of this study are indicative and suggestive. They confirm a tendency for corporations to move from seeking legitimacy and compensation to real carbon reductions and improving performance. This seems to align with

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several previous surveys which find that more changes are occurring in business practice than academic research has identified in the past. For example, Ernst and Young's (2012) study finds that while corporate sustainability once focused mainly on meeting external pressures, it has now become a much more strategic topic inside many companies. Likewise, KPMG's (2008) survey indicates that companies have realised that they need to play a key role in contributing to healthy societies, ecosystems and economies, and that it is in their best interest to maintain and improve in these areas. These studies may suggest that corporate sustainability is (slowly) being further integrated into core business, and that the focus of collecting and disclosing environmental information is moving from (merely) obtaining organisational legitimacy to obtaining and providing information for problem solving and decision making by business managers. These results have practical implications for business corporations (both good and poor performers) that carbon disclosure is not just a tool for survival, but is also significantly of value if the benefits are used and internalised to direct emission reduction and performance changes. The policy implication of our findings is that future environmental and carbon policy should focus more on supporting management and employees to improve knowledge, skills and capability to implement performance measurement, rather than on producing more reports and guidelines. Policies need to be directed towards encouraging the development and application of carbon accounting, as well as costing tools and methods for achieving the intended carbon reduction targets. The lack of engagement and application of measurement tools for sustainability, as highlighted in the studies by Hartmann et al. (2013) and Passetti, Cinquini, Marelli, and Tenucci (2014), and the empirical results that different accounting tools reveal  €risch, Ortas, Schaltegger, & Alvarez, different levels of environmental performance effectiveness (Ho 2015), confirm the need to guide corporate practice. Caution may need to be taken when interpreting the results of this study. Despite examining a relatively longer time period (five years with annual data from 2008 to 2012) than many other studies of carbon performance, the analysis still covers a limited time span and relies heavily on large corporate samples. The use of lead-lag change analysis further reduces the sample data, which may affect the explanatory power of the predictions. In addition, we acknowledge that the lagged effect is likely to extend over several years (Hart & Ahuja, 1996), which has not been examined in this study because of limited data coverage. Also, there may be some selection bias contained in the CDP database, as responses to the CDP reporting requests are voluntary. Although variable measures are justified and all based on previous studies, there may be some limitations in choosing proxies and other control variables that have not been included (possibly management passion and so forth). While our study reveals change effects and supports the outside-in perspective, we have not further analysed possible reasons for these effects. For example, the fact that maintaining a positive sales growth rate goes alongside driving the reduction of carbon emission intensity may indicate that economically successful companies tend to improve their carbon performance. However, another possible explanation for the finding that sales growth precedes lower carbon emissions could be that the sales growth is achieved by effective measures which lead to carbon emission reductions (such as the introduction of new low carbon products increases sales and as a consequence reduces carbon emissions in the production process). Future research may investigate whether this explanation is empirically valid. Furthermore, our result that a change of capital intensity contributes to the changes of carbon intensities indicates that companies with increasing capital spending are relatively more capable of managing their carbon performance effectively. Future research may investigate in more detail whether carbon emission reductions require investments in more (energy) efficient technology. Also, to support the movement from simply demonstrating legitimacy to performance change, future research needs to further explore the processes that business managers can adopt to go beyond mere legitimacy securing to internalise the legitimacy pressures and demands in order to create real improvements. This may reflect the latest call for more performance measurement studies of carbon management accounting by Hartmann et al. (2013). As Adams and Whelan (2009) highlight, the debate about sustainability reporting should move away from a simple focus on maintenance of legitimacy to potential ‘cognitive dissonance’ and ‘a felt need for change’ by managers (p. 135). In addition, possible shifts of carbon emissions to suppliers as part of outsourcing strategies (Schaltegger & Csutora, 2012) could be further investigated. Future research that extends carbon performance measures to carbon efficiency and investigates the association between carbon efficiency levels and disclosure should be encouraged.

Acknowledgement The authors would like to thank the participants and reviewers of the 7th Asia Pacific Interdisciplinary Research in Accounting Conference, the 17th Environmental and Sustainability Management Accounting Conference, and the University of South Australia Business School research seminar. Thanks are given to Professor Christine Helliar, Professor Chris van Staden, €risch for their constructive feedbacks and suggestions on the earlier versions of Associate Professor Janet Lee and Dr Jacob Ho this paper. In particular, we would like to thank Professor Chris Chapman for his useful comments when we developed this paper in its early stage. The authors also gratefully acknowledge the editing support from Elite Professional Editing service and Mr Paul Lauer at Leuphana University Lüneburg.

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