The Verbal Tone in Mandatory Environmental Disclosures: Evidence from Changes in Disclosures Following SEC Guidance

ABSTRACT

This study investigates whether the verbal tone of environmental disclosures in companies’ annual reports changed following SEC interpretive guidance released in 2010. The content analysis software DICTION is used to construct measures of verbal tone and size of the disclosures. For a sample of companies in both environmentally sensitive and non-sensitive industries, we find an increase in the degree of ‘realism’ and ‘certainty’ of the disclosures following the release of the SEC guidance. The results hold after controlling for environmental performance and firm specific characteristics. In addition, the size of environmental disclosures increased in the year preceding the release of the guidance, suggesting that companies may have anticipated an interpretive release from the SEC. Furthermore, there were no significant changes in the size and verbal tone of voluntary environmental disclosures over the same time period, suggesting that the changes in the annual reports filed with the SEC resulted primarily from companies’ responses to the interpretive guidance. These findings show that impressions management is less prevalent in mandated environmental disclosures.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 Federal Register, Vol. 75, No. 25, February 8, 2010. http://www.sec.gov/rules/interp/2010/33-9106fr.pdf

2 The guidance provides examples of climate change related risks that are material for companies and investors, including legislation and regulation, the impact of international accords, indirect consequences of changes in business trends, and physical impacts. The guidance states that ‘In addition to legislative, regulatory, business and market impacts related to climate change, there may be significant physical effects of climate change that have the potential to have a material effect on a registrant's business and operations’.

3 In 2007, a petition sent to the SEC by a group of investors, state agencies and environmental advocates, led by Ceres, a non-profit sustainability advocacy organisation, urged the SEC to issue guidance on climate-related impacts. The petition includes the following passage:

Recent scientific, legal, and regulatory developments make it unavoidably clear that the risks and opportunities many corporations face in connection with climate change fall squarely within the category of material information that is required to be analyzed and disclosed in many corporate filings. Yet corporate disclosures of the risks and opportunities created by climate change lag behind these developments, and investors are left with little or in some cases no useful information about corporate exposure to these risks.

4 https://www.sec.gov/spotlight/invadvcomm/iacmeeting072709-briefingpaper.pdf

5 For a more extensive literature review on climate change related disclosures please see Hahn, Reimsbach, and Schiemann (2016).

6 We rerun the results including pharmaceutical in the environmentally sensitive classification, as this industry may be considered a major polluter. However, the results are not significantly different and our findings hold.

7 There were 14 companies in the initial sample with fiscal year end in March, April or May, all of them in non-environmentally sensitive industries. We ran the analysis for the sample including these 14 companies but the significance of the results is not changed.

8 The search terms are the words related to climate change with higher frequency obtained from manually reading a subsample of annual reports.

9 Examples of paragraphs excluded from the analysis included the expressions: ‘business environment’, ‘shopping environment’, ‘economic environment’, ‘spending environment’, ‘recovery sustainability’, ‘cash sustainability program’, ‘investment climate’, ‘financial climate’, ‘regulatory climate’, ‘economic climate’, ‘political climate’, ‘business climate’, ‘debt sustainability’, ‘organization sustainability’, ‘sustainability of developing market’, ‘sustainability of public debt’, ‘sustainability of economic recovery’, ‘the sustainability of our business’, ‘sustainability of uncertain tax position’, ‘industry climate’, ‘a climate of economic and political uncertainty’, ‘the sustainability of current US Government spending levels’, ‘sustainability of the level of tax return’, ‘achieve sustainability in the area’, ‘sustainability of controls’.

10 https://www.dictionsoftware.com. Also see Cho, Roberts, and Patten (2010) for a more detailed description of DICTION. DICTION was originally developed by Roderick P. Hart, a communication professor.

11 Environmental strengths include the following attributes: Beneficial products and services, pollution prevention, recycling, clean energy, communications, and other strength, management systems strength, water stress, biodiversity and land use, raw material sourcing, natural resource use, green buildings, renewable energy, waste management, energy efficiency, product carbon footprint, insuring climate change risk. Environmental concerns include the following attributes: Hazardous waste, regulatory problems, ozone depleting chemicals, substantial emissions, agricultural chemicals, climate change, and other concerns, negative impact of products and services, and use and biodiversity, non-carbon releases, supply chain management.

12 Information collected from http://uselectionatlas.org.