Non-financial Reporting as a Form of Environmental Disclosure: The Case of International Construction Industry
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Introduction 6
Chapter I. Literature review 8
1.1. Environmental impact of construction industry 8
1.2. Environmental responsibility and its assessment tools 10
1.3. Role of non-financial reporting 14
1.4. Rating method: pros and cons and limitations 18
1.5. Summary of findings from Chapter 1 21
Research gap 21
Chapter II. Data collection and methodology 22
2.1. Choice of methodology 22
2.2. Data collection and sample description 23
2.3. Methodology 24
2.4. Obstacles and limitations 25
Chapter III. Analysis results discussion 26
3.1. Creation of the indicator list 26
3.2. Degree of disclosure by the companies 28
3.3. Degree of disclosure per indicator 30
3.4. Construction industry-specific environmental indicators 33
3.5. Degree of disclosure and ROI 34
3.6. Summary of findings from Chapter III 38
Conclusions 39
List of references 42
Appendix
Chapter I. Literature review 8
1.1. Environmental impact of construction industry 8
1.2. Environmental responsibility and its assessment tools 10
1.3. Role of non-financial reporting 14
1.4. Rating method: pros and cons and limitations 18
1.5. Summary of findings from Chapter 1 21
Research gap 21
Chapter II. Data collection and methodology 22
2.1. Choice of methodology 22
2.2. Data collection and sample description 23
2.3. Methodology 24
2.4. Obstacles and limitations 25
Chapter III. Analysis results discussion 26
3.1. Creation of the indicator list 26
3.2. Degree of disclosure by the companies 28
3.3. Degree of disclosure per indicator 30
3.4. Construction industry-specific environmental indicators 33
3.5. Degree of disclosure and ROI 34
3.6. Summary of findings from Chapter III 38
Conclusions 39
List of references 42
Appendix
The topic of environmental responsibility is gaining popularity both in research and in industry. Along with the social and the economical responsibility, the environmental responsibility is an essential part of companies’ sustainability policy.
Construction industry is one of the most environmentally-damaging, and thus, the issue of environmental responsibility is particularly acute there. Richard and Ramli (2011) point out the main ecological consequences of construction work: land and water pollution, CO2 emissions, high proportion of waste, energy and water consumption, deforestation, among others. This explains the actuality of the chosen research topic.
Analysis of literature has shown that construction is rarely a subject of research, and little academic discussion can be found about the specificity of sustainability measures that should be taken in construction. There are many national environmental standards for construction but no universal (international) framework that would exhaustively explain how to measure and estimate companies’ environmental performance. The novelty of this research paper lies in the methodology of assessment of environmental performance and in the final result - the environmental responsibility rating of international construction companies.
The main purpose of this paper is to discover the main tendencies in the environmental disclosure by the international construction companies. To reach this purpose, the research targets the following goals:
- Reveal the limitations of existing environmental methodologies through the analysis of contemporary academic literature;
- Collect a pool of relevant indicators to estimate construction industry’s impact on the environment;
- Find out the degree of disclosure for each indicator;
- Discuss whether it is possible to rank the companies using secondary data (non- financial reports);
- Make conclusions about the main factors that influence the content of environmental reports by the construction companies.
This research paper is framed by the following research questions:
(1) What is the degree of environmental disclosure by the international construction companies? Is it possible to rank the companies by their environmental performance based on the information they disclose in their non-financial reports?
(2) Are there any construction industry-specific environmental issues that are not covered by major corporate sustainability assessment frameworks?
(3) Is higher degree of disclosure associated with higher investor attractiveness?
The research paper contains an introduction, three chapters followed by summaries of findings, a conclusion, annexes and a list of references. The first chapter gives an overview of literature on environmental responsibility and reporting, the impact of the construction industry on the environment, and the main challenges of rating methodologies. The second chapter describes the data collection process and the methodology of the current study. The third chapter presents the results - a proposed list of environmental performance indicators for the construction industry, and discusses how the new methodology tackles the challenges of environmental performance assessment and of the rating methodology. The conclusions section summarises the learnings and presents them as answers to the research questions. Theoretical and managerial implications as well as directions for further research are also discussed in the conclusions.
It should be noted at this point that in this paper the terms „environmental performance’ and „environmental responsibility’ are used interchangeably. Sometimes the term „sustainability’ may be used as a hyperonym for environmental responsibility since the latter is one of the three aspects of sustainability.
Construction industry is one of the most environmentally-damaging, and thus, the issue of environmental responsibility is particularly acute there. Richard and Ramli (2011) point out the main ecological consequences of construction work: land and water pollution, CO2 emissions, high proportion of waste, energy and water consumption, deforestation, among others. This explains the actuality of the chosen research topic.
Analysis of literature has shown that construction is rarely a subject of research, and little academic discussion can be found about the specificity of sustainability measures that should be taken in construction. There are many national environmental standards for construction but no universal (international) framework that would exhaustively explain how to measure and estimate companies’ environmental performance. The novelty of this research paper lies in the methodology of assessment of environmental performance and in the final result - the environmental responsibility rating of international construction companies.
The main purpose of this paper is to discover the main tendencies in the environmental disclosure by the international construction companies. To reach this purpose, the research targets the following goals:
- Reveal the limitations of existing environmental methodologies through the analysis of contemporary academic literature;
- Collect a pool of relevant indicators to estimate construction industry’s impact on the environment;
- Find out the degree of disclosure for each indicator;
- Discuss whether it is possible to rank the companies using secondary data (non- financial reports);
- Make conclusions about the main factors that influence the content of environmental reports by the construction companies.
This research paper is framed by the following research questions:
(1) What is the degree of environmental disclosure by the international construction companies? Is it possible to rank the companies by their environmental performance based on the information they disclose in their non-financial reports?
(2) Are there any construction industry-specific environmental issues that are not covered by major corporate sustainability assessment frameworks?
(3) Is higher degree of disclosure associated with higher investor attractiveness?
The research paper contains an introduction, three chapters followed by summaries of findings, a conclusion, annexes and a list of references. The first chapter gives an overview of literature on environmental responsibility and reporting, the impact of the construction industry on the environment, and the main challenges of rating methodologies. The second chapter describes the data collection process and the methodology of the current study. The third chapter presents the results - a proposed list of environmental performance indicators for the construction industry, and discusses how the new methodology tackles the challenges of environmental performance assessment and of the rating methodology. The conclusions section summarises the learnings and presents them as answers to the research questions. Theoretical and managerial implications as well as directions for further research are also discussed in the conclusions.
It should be noted at this point that in this paper the terms „environmental performance’ and „environmental responsibility’ are used interchangeably. Sometimes the term „sustainability’ may be used as a hyperonym for environmental responsibility since the latter is one of the three aspects of sustainability.
The main purpose of this paper was to reveal the main tendencies in the environmental disclosure in the international construction industry.
In order to do so, we started the paper by analysing the limitations of environmental assessment methodologies discussed in scientific research. We have looked at the most popular sustainability disclosure and performance assessment tools. They can be divided into non¬industry specific (such as GRI, ESG) and industry-specific tools (such as LEED, BREEAM). The latter are focused on the green product and do not help assess the performance at a corporate level.
Then we collected a pool of environmental performance indicators from four different sources: GRI, KLD Analytics, RobecoSAM and Walls et al. (2011). We matched the indicators that have the same subject matter and shortlisted them to eliminate repetition and establish maximum coverage of the issues. After that, we screened 30 environmental reports published by the international construction companies according to the indicator list. We assigned scores for full and partial disclosure and ranked the companies by the sum of the scores. This allowed us to run a regression analysis later to find whether there is a relationship between the degree of environmental disclosure and ROI.
From the academic literature we have found out that non-financial reporting might be a powerful medium of communication with the stakeholders, it creates an image about the company and could help attract new, sustainability-conscious, investors. However, as is shown in chapter 3 of this paper, reports are of little use when it comes to comparing companies’ environmental performances.
Answering the research question 1, we can say that unless the companies are obliged to report by the same system and have similar degree of disclosure, there is too much missing data that hinders comparative analysis.
All companies, except Samsung Engineering, disclosed on less than 50% of indicators. Companies that do not use any reporting standard as a reference showed the least degree of environmental disclosure, as did the companies that use a very liberal ESG approach to reporting. The majority of the companies used the GRI format of reports, however not all of them were registered in the GRI database, which means not all those reports were graded by quality.
It was also found that almost all companies disclosed on the issues that are regulated by the governments (for example, GHG emissions and energy use), easy to collect information about and produce a positive image. The least disclosed indicators turned to be difficult to measure and benchmark. In this case, the companies preferred to call them immaterial, or insignificant to the companies’ goals and overall performance.
The second research question addressed industry-specific indicators that might be found in the non-financial reports beyond the original set of indicators. We found that the companies sometimes disclosed in more detail about environmental issues that it was prescribed in the standards, but only two industry-specific indicators were found among them: soil removed, reused soil and construction-generated soil emissions.
Finally, the results of the regression analysis showed that higher ROI is not associated with higher degree of environmental disclosure (answer to the research question 3). This means that the environmental disclosure degree alone is not enough to facilitate investor decision¬making. Besides, the lack of investor pressure to report the environmental performance might explain such low degree of disclosure in the industry.
Therefore, the main influential factors for the environmental disclosure in non-financial reports remain to be only the measurability of the issues (and, thus, the easiness to collect information) and the established environmental regulations.
In order to do so, we started the paper by analysing the limitations of environmental assessment methodologies discussed in scientific research. We have looked at the most popular sustainability disclosure and performance assessment tools. They can be divided into non¬industry specific (such as GRI, ESG) and industry-specific tools (such as LEED, BREEAM). The latter are focused on the green product and do not help assess the performance at a corporate level.
Then we collected a pool of environmental performance indicators from four different sources: GRI, KLD Analytics, RobecoSAM and Walls et al. (2011). We matched the indicators that have the same subject matter and shortlisted them to eliminate repetition and establish maximum coverage of the issues. After that, we screened 30 environmental reports published by the international construction companies according to the indicator list. We assigned scores for full and partial disclosure and ranked the companies by the sum of the scores. This allowed us to run a regression analysis later to find whether there is a relationship between the degree of environmental disclosure and ROI.
From the academic literature we have found out that non-financial reporting might be a powerful medium of communication with the stakeholders, it creates an image about the company and could help attract new, sustainability-conscious, investors. However, as is shown in chapter 3 of this paper, reports are of little use when it comes to comparing companies’ environmental performances.
Answering the research question 1, we can say that unless the companies are obliged to report by the same system and have similar degree of disclosure, there is too much missing data that hinders comparative analysis.
All companies, except Samsung Engineering, disclosed on less than 50% of indicators. Companies that do not use any reporting standard as a reference showed the least degree of environmental disclosure, as did the companies that use a very liberal ESG approach to reporting. The majority of the companies used the GRI format of reports, however not all of them were registered in the GRI database, which means not all those reports were graded by quality.
It was also found that almost all companies disclosed on the issues that are regulated by the governments (for example, GHG emissions and energy use), easy to collect information about and produce a positive image. The least disclosed indicators turned to be difficult to measure and benchmark. In this case, the companies preferred to call them immaterial, or insignificant to the companies’ goals and overall performance.
The second research question addressed industry-specific indicators that might be found in the non-financial reports beyond the original set of indicators. We found that the companies sometimes disclosed in more detail about environmental issues that it was prescribed in the standards, but only two industry-specific indicators were found among them: soil removed, reused soil and construction-generated soil emissions.
Finally, the results of the regression analysis showed that higher ROI is not associated with higher degree of environmental disclosure (answer to the research question 3). This means that the environmental disclosure degree alone is not enough to facilitate investor decision¬making. Besides, the lack of investor pressure to report the environmental performance might explain such low degree of disclosure in the industry.
Therefore, the main influential factors for the environmental disclosure in non-financial reports remain to be only the measurability of the issues (and, thus, the easiness to collect information) and the established environmental regulations.