Market valuation of greenhouse gas emissions under a mandatory reporting regime: Evidence from the UK

Abstract

This study provides evidence on the potential benefits of mandatory environmental reporting for listed firms’ market valuation. It takes advantage of recent regulation that requires all listed firms in the UK to report their annual greenhouse gas (GHG) emissions in their annual reports and shows that the magnitude of the negative association between GHG emissions and the market value of listed firms decreased after the introduction of the reporting regulation. This decline is attributed to regulation forestalling shareholders’ negative reflexive reaction toward firms’ carbon disclosures, as proposed by the theoretical work of Unerman and O’Dwyer (2007).

Keywords:

• Greenhouse gas emissions
• Value relevance
• London Stock Exchange
• Mandatory disclosures
• Reporting regulation

Acknowledgments

I am thankful to Gunnar Rimmel and Ioannis Tsalavoutas for their valuable comments on earlier versions of the study. Further, I am appreciative of the efforts of Glen Lehman (Editor) and two anonymous reviewers, whose comments substantially improved this study. I am also grateful to the Handelsbanken's ‘Jan Wallanders och Tom Hedelius’ Research Foundation for its generous financial support.

Notes

1 In this study, the terms ‘greenhouse gas’ and ‘carbon’ are used interchangeably.

2 Examples include the Carbon Disclosure Project, the North American Climate Registry, the Australian National Greenhouse and Energy Reporting Act and the Canadian Greenhouse Gas Emissions Reporting Program, to name a few.

3 Ascui (2014) finds that the number of published research papers in the broad field of carbon accounting (which includes carbon reporting) tripled in 2009 compared with the previous year, and the number has continued to increase at an average of 66% per year since then.

4 The Companies Act 2006 requires listed firms to provide a narrative in their annual reports about their environmental issues to the extent that it is necessary for the understanding of firms’ performance, but it does not require disclosure of GHG emissions. The Carbon Reduction Commitment 2010 requires firms that use more than 6000 MWh per year of energy to measure their emissions, but they must report this information to the governmental Environment Agency and not to the public [for further information about previous regulations, see Kauffmann et al. (2012) and KPMG et al. (2013)].

5 The Carbon Disclosure Project has been publishing reports about the annual carbon emissions of FTSE 350 firms listed on the LSE since 2006. Further information can be found here: https://www.cdp.net/en-US/Results/Pages/All-Investor-Reports.aspx.

6 It is worth stressing that the first hypothesis, although it does not make any new contributions to the literature, provides the necessary foundation for testing the two following hypotheses, which examine differences in the market valuation of carbon disclosures before vis-à-vis after the introduction of the 2013 Regulation.

7 The author would like to thank a reviewer for this suggestion.

8 The definitions of all variables and the sources from which the required data are extracted are presented in the Appendix.

9 Variables definitions are provided in the Appendix.

10 The Thomson Reuters ASSET4 database contains a wide range of environmental, social and governance information for almost 5000 firms around the world. All information is collected from publicly available sources, and its quality is scrutinized by experienced analysts (Thomson Reuters, 2015).

11 Observations with Cook's distance greater than 4/n, where n is the number of observations, are excluded.

Additional information

Notes on contributors

Diogenis Baboukardos

Diogenis Baboukardos is a Lecturer in Accounting at Essex Business School, University of Essex in the UK. His research interests lie in the broad field of financial and non-financial (sustainability/CSR) reporting with particular focus on its market valuation implications and on the role ownership plays on reporting practice. He has published in Journal of Accounting and Public Policy and Accounting Forum.