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Environmental information

A study of environmental disclosure in financial analyst reports, annual reports, CSR reports and environmental risk profiles

Written by D. Boström

Paper category

Master Thesis

Subject

Business Administration>Management

Year

2008

Abstract

Master Thesis: Environmental risks The environmental risks of companies can be measured and observed in a variety of ways. Traditionally, the most commonly used environmental assessment method is to assess environmental risks, focusing on “bad news” rather than “good news”. This finding is particularly prominent in Anglo-Saxon countries15. Many studies have been conducted over the years to examine the types of information related to market value or stock price changes. For example, Chan & Milne16 conducted a study based on the types of environmental-related information and found that investors reacted negatively to poor environmental performance, but did not seem to respond significantly to good and good environmental performance. According to research in this field, the company’s environmental readiness and performance can be used to manage company-specific risks17. Another way to assess a company's risk profile is to assess the industry in which the company operates. Different industries have obvious reasons for different environmental risk conditions; the environmental framework of the banking and investment sector is different from that of the automobile industry. The results of research in this area indicate that environmental regulation in polluting industries seems to increase operational uncertainty and have a negative impact on productivity18. Therefore, when assessing a company's environmental risk status, it is important to analyze the company's industry. Therefore, a useful method is to observe the company's environmental risk status by dividing the risks into company-specific risks and industry-specific risks. The research includes a variable that evaluates the environmental risk status of the company under study by examining company-specific risks and industry-specific risks. The environmental risk rating is developed by the Global Ethical Standards (GES) Investment Services, a sustainability research provider, and is described in more detail in Chapter 3 and Appendix 2. 2.3. Financial analysts Financial analysts are usually regarded as the professional knowledge link between the company and various stakeholders interested in the company and its activities. Collecting and interpreting information from various sources will produce company recommendations, usually as specific recommendations for buying/holding/selling specific stocks, usually in a time frame of 6-18 months. The role of financial analysts is an important part of the investment value chain. Financial analysts are highly specialized in their field of expertise, and are usually regarded as expertise based on which other people make decisions and take actions. A study conducted by Womack19 shows that analyst publications do have an impact on the price of specific stocks. 2.5 Environmental performance and disclosure Financial theory generally believes that various stakeholders need information related to company performance and future forecasts. However, there has been no consensus on the importance and relevance of environmental information for many years. The change in the concept of sustainability and environmental disclosure can be seen in many ways. From the traditional regulatory-based cost center, it has now turned to create opportunities from emerging sustainability requirements. Due to the growing demand for environmentally friendly products and solutions manufactured in a sustainable manner, companies such as DuPont, General Electric, and Procter & Gamble have increased their research on environmentally friendly products32. Flöstrand & Ström33 studied the non-financial information disclosures in the annual reports of 200 financial analysts and S&P 500 companies, and their findings revealed insights into the relationship between these two sources of information. The amount of non-financial information in the financial analyst report seems to be related to the level of non-financial information in the annual report. Company size also has an impact, because analysts tend to include more relevant non-financial information when evaluating large companies. In addition to the historically dominant financial information, companies tend to play a greater role for non-financial information. 2.6 Value relevance theory Value relevance theory is an important part of the theoretical background of this research. It can gain insight into the problem of evaluating the company's value creation activities. Many views have emerged over the years, among which the foundation is more or less concerned with two methods; the method of focusing on the cost and the method of focusing on the value. 2.6.1 The method of focusing on cost and focusing on value Environmental performance and the way in which investment in environmental activities affects the value of a company (and thus affects the relevance of environmental disclosure) can be divided into two major schools: The cost-focused school believes that environmental investment only represents company costs The value-focused school of thought sees environmental investment as a way to create a competitive advantage in the market and a means to increase financial returns to investors. Therefore, the cost-focused approach expects a negative correlation between company performance and its environmental performance. Wally and Whitehead 34 believe that it is very rare that this type of environmental investment leads to a higher financial value of the company's win-win situation, and the opposite is more likely to happen, especially when researchers consider the cost of environmental activities. Read Less