CORPORATE SUSTAINABILITY IN AUSTRALIA ...Corporate Sustainability in Australia: Performance, Disclosure and Governance iii a firm has disclosed sustainability information, and it investigates

CORPORATE SUSTAINABILITY IN

AUSTRALIA: PERFORMANCE,

DISCLOSURE AND GOVERNANCE

Zhongtian Li

Master of Business (Research)

Submitted in fulfilment of the requirements for the degree of

Doctor of Philosophy

School of Accountancy

QUT Business School

Queensland University of Technology

2020

Corporate Sustainability in Australia: Performance, Disclosure and Governance i

Keywords

Australia, Corporate Sustainability, Corporate Social Responsibility, Diction 7,

Readability, Sustainability Committee, Sustainability Disclosure, Sustainability

Reporting, Sustainability Performance, Thomson Reuters ASSET4, Tone of

Language

ii Corporate Sustainability in Australia: Performance, Disclosure and Governance

Abstract

This PhD thesis has three motivations. First, the current regulatory environment

for voluntary corporate sustainability in Australia is under pressure to become a more

structured framework. It is expected that more understanding about current corporate

sustainability practices actively contribute to relevant policy discussion. Secondly,

richer knowledge of corporate sustainability is beneficial to stakeholders, as corporate

sustainability continues to grow in importance. Thirdly, prior literature identifies fresh

research opportunities awaiting exploration.

Accordingly, I investigate the three themes in this thesis, namely sustainability

performance, sustainability disclosure and sustainability governance in the form of the

sustainability committee. Collectively, these themes emphasize listed firms’ practices

in Australia and form part of a larger research agenda of sustainability. Corresponding

research questions are proposed:

1) Whether and how is an Australian firm’s sustainability performance

associated with its sustainability disclosure?

2) How is experience of disclosure (i.e. number of years as to sustainability

disclosure) related to sustainability performance?

3) How is the sustainability committee related to sustainability performance?

This is operationalized as:

a. How is the presence of a sustainability committee related to

sustainability performance?

b. How is the effectiveness of the sustainability committee related to


Chapter 3 answers the first research question, and Chapter 4 addresses the second

and third research questions. Seven textual characteristics of disclosure are examined

in Chapter 3: how much sustainability information, quantitative information and

information about environmental impact is disclosed, to what extent disclosure is

readable, and to what extent disclosure is communicated in optimistic, certain and clear

terms. Chapter 4 operationalizes experience of disclosure as the number of years that

Corporate Sustainability in Australia: Performance, Disclosure and Governance iii

a firm has disclosed sustainability information, and it investigates the sustainability

committee from two aspects, namely presence and committee effectiveness.

Chapter 3 and 4 embrace different theories and develop hypotheses to explore

research questions. In Chapter 3, institutional theory and signalling theory are used to

develop hypotheses as to relationships between textual characteristics of sustainability

disclosure and sustainability performance. Chapter 4 considers prior literature about

(audit) committee effectiveness, resource dependency theory and stewardship theory

to develop hypotheses about experience of disclosure, the sustainability committee and

sustainability performance. As two chapters use different sets of control variables, the

sample sizes in them are slightly different.

By analysing 2,076 firm-year observations from 2002 to 2016, this thesis finds

good performers disclose more information, more quantitative data, more evidence

about environmental impact and present the information in optimistic, certain and clear

terms; good performers communicate in a more readable way. Whether sustainability

information is disclosed in an annual report or a standalone report affects relationships

between textual characteristics and sustainability performance. Varied sample periods

are found to affect the relationships. Different sectoral environments also affect how

sample firms prepare the information included in their sustainability disclosure. The

findings are robust to alternative measurement on performance and alternative model

specification. Lastly, textual characteristics in one period do not necessarily associate

with the sustainability performance occurring in a following period, and vice versa.

By examining 2,166 firm-year observations (2002 – 2016), this thesis reveals a

positive relationship between presence of a sustainability committee and sustainability

performance, and a positive relationship between the experience of disclosure and

sustainability performance. Through examining 430 firm-year observations in relation

to sustainability committees (2002 – 2016), I identify a positive relationship between

sustainability committee effectiveness and environmental performance. Moreover, I

find that increased resources and greater authority granted to sustainability committees

improves sustainability performance.

In modelling the relation between sustainability governance and performance, I

build into the research design endogeneity concerns due to several possible reasons,

including omitted variables, omitted selection and simultaneity. Thus, the propensity

score matching and dynamic generalized method-of-moments are adopted, and my

iv Corporate Sustainability in Australia: Performance, Disclosure and Governance

findings are not distorted by this endogeneity concern. Different sectoral environments

are found to affect the relation between the sustainability committee and sustainability

performance, yet varied sample periods do not have that same influence. Findings in

this chapter also are robust to alternative measurement of sustainability performance.

This thesis contributes to prior literature in at least two ways. First, it enriches

the knowledge about sustainability disclosure from linguistic perspectives. Secondly,

it contributes to the growing field, namely sustainability committee that is expected to

be an opportunity to better integrate sustainability into corporate governance.

From the view of theoretical contributions, this thesis uses different theories to

develop several hypotheses. First, as suggested by prior studies, Chapter 3 investigates

the explanatory power of both signalling theory and institutional theory. Differing

from the literature, this chapter explores an alternative context, namely various textual

characteristics of disclosure. Extending incomplete revelation hypothesis, Chapter 3

introduces this hypothesis to the corporate sustainability literature. Secondly, Chapter

4 explores stewardship theory and resource dependency theory within the context of a

sustainability committee.

Regarding practical implications, these findings do not support the existence of

greenwashing in sustainability disclosure. As a sustainability committee contributes to

environmental performance, regulators and market operators can encourage directors

in Australia to form such committees and ensure their efficacy to better integrate

sustainability with corporate governance. Readability of sustainability disclosure

information should be further considered by regulators in future regulatory framework,

as this thesis reveals that those who read sustainability disclosures can be misled by

how poor performers communicate their performance.

Corporate Sustainability in Australia: Performance, Disclosure and Governance v

Table of Contents

Keywords..............................................................................................................................i

Abstract ...............................................................................................................................ii

Table of Contents ................................................................................................................. v

List of Figures .................................................................................................................... vii

List of Tables ....................................................................................................................viii

List of Abbreviations............................................................................................................ x

Statement of Original Authorship ........................................................................................ xi

Acknowledgements ............................................................................................................ xii

Chapter 1: Introduction .................................................................................... 1

1.1 Regulatory Framework ............................................................................................... 2

1.2 Research Motivations ................................................................................................. 5

1.3 Research Purpose and Questions ................................................................................ 9

1.4 Contributions ........................................................................................................... 14

1.5 Summary of the Findings ......................................................................................... 17

1.6 Thesis Outline .......................................................................................................... 18

Chapter 2: Literature Review......................................................................... 27

2.1 Sustainability Disclosure and Sustainability Performance ......................................... 27

2.2 Linguistic Studies about Financial Information ......................................................... 33

2.3 Corporate Governance and Sustainability Performance ............................................. 36

2.4 Corporate Governance and Sustainability Disclosure ................................................ 38

2.5 Corporate Sustainability: Australian Evidence Since 2014 ........................................ 41

Chapter 3: Textual Characteristics of Sustainability Disclosure and their

Relationship to Sustainability Performance ........................................................ 61

3.1 Introduction ............................................................................................................. 61

3.2 Relevant Key Literature ........................................................................................... 65

3.3 Theoretical Framework and Hypothesis Development .............................................. 67

3.4 Research Design ....................................................................................................... 71

3.5 Results ..................................................................................................................... 86

3.6 Discussion and Conclusion ..................................................................................... 111

Chapter 4: The Sustainability Committee, Experience of Sustainability

Disclosure and Sustainability Performance ....................................................... 115

4.1 Introduction ........................................................................................................... 115

4.2 Literature Review ................................................................................................... 119

4.3 Theoretical Framework and Hypothesis .................................................................. 121

vi Corporate Sustainability in Australia: Performance, Disclosure and Governance

4.4 Research Design .................................................................................................... 125

4.5 Results ................................................................................................................... 137

4.6 Discussion and Conclusion..................................................................................... 160

Chapter 5: Conclusions ................................................................................ 163

5.1 Summary of this Thesis .......................................................................................... 163

5.2 Summary of the Findings ....................................................................................... 166

5.3 Contributions and Practical Implications ................................................................ 168

5.4 Limitations and Opportunities for Future Research ................................................. 173

Appendices .......................................................................................................... 175

Appendix A Details about Asset4’s Scores ....................................................................... 175

Appendix B Example of Sustainability Disclosure – Input to Diction 7 ............................ 179

Appendix C Outputs from Diction 7 ................................................................................. 181

Appendix D Principal Component Analysis of Four Readability Indices........................... 188

Appendix E Example of a Sustainability Committee ........................................................ 189

Appendix F Example of How Information about Committee Members is Collected .......... 190

Bibliography ....................................................................................................... 199

Corporate Sustainability in Australia: Performance, Disclosure and Governance vii

List of Figures

Figure 1-1 Libby Boxes for Research Questions...................................................... 19

Figure 1-2 Thesis Roadmap .................................................................................... 25

Figure 3-1 Asset4’s Scores Structure: Environmental Performance/Score and

Social Performance/Score.......................................................................... 76

Figure 3-2 Asset4’s Scores Structure: Corporate Governance

Performance/Score and Economic Performance/Score ............................... 77

Figure 5-1 Connections between Chapter 3 and 4 .................................................. 165

viii Corporate Sustainability in Australia: Performance, Disclosure and Governance

List of Tables

Table 1-1 Summary of Key Components in this Thesis ........................................... 12

Table 2-1 Overview of Seminal Studies about the Relationship between

Sustainability Disclosure and Sustainability Performance ......................... 28

Table 2-2 Overview of Seminal Studies about Relationship between

Sustainability Disclosure and Corporate Governance ................................ 39

Table 2-3 Basic Information about 54 Studies from 2014 to 2018 in Nine

Designated Accounting Journals ............................................................... 43

Table 2-4 Summary of 54 Studies from 2014 to 2018 on Nine Designated

Accounting Journals.................................................................................. 44

Table 2-5 Research Themes and Methods of 54 Studies from 2014 to 2018 in

Nine Designated Accounting Journals ....................................................... 54

Table 3-1 Sample Selection .................................................................................... 73

Table 3-2 Variables and Their Measurements ......................................................... 81

Table 3-3 Descriptive Statistics .............................................................................. 87

Table 3-4 Correlation Matrix of Variables .............................................................. 88

Table 3-5 Equation (1) – Unexpected Part of Sustainability Performance

(DA_CSP) ................................................................................................ 90

Table 3-6 H1 and H2 .............................................................................................. 92

Table 3-7 Signalling Effects of Textual Characteristics in Sustainability

Disclosure ................................................................................................. 96

Table 3-8 Alternative Measurement on Sustainability Performance ........................ 98

Table 3-9 Sectoral Analysis .................................................................................. 101

Table 3-10 Disclosure Channels: Standalone Report versus Annual Report .......... 104

Table 3-11 Time Stability ..................................................................................... 106

Table 3-12 Alternative Model Specification.......................................................... 108

Table 3-13 Inclusion of Firms’ Experience of Sustainability Disclosure as a

Control ................................................................................................... 110

Table 4-1 Sample Selection .................................................................................. 126

Table 4-2 Variables and Their Measurements ....................................................... 133

Table 4-3 Descriptive Statistics ............................................................................ 138

Table 4-4 Correlation Matrix of Variables ............................................................ 139

Table 4-5 Experience of Sustainability Disclosure, the Presence of a

Sustainability Committee and Sustainability Performance – H3 and

H4a ......................................................................................................... 141

Corporate Sustainability in Australia: Performance, Disclosure and Governance ix

Table 4-6 Sustainability Committee Effectiveness and Sustainability

Performance – H4b.................................................................................. 143

Table 4-7 PSM – H3 ............................................................................................. 147

Table 4-8 PSM – H4a ........................................................................................... 148

Table 4-9 Dynamic GMM – H3 and H4a .............................................................. 149

Table 4-10 Dynamic GMM – H4b ........................................................................ 150

Table 4-11 2SLS – H4b ........................................................................................ 151

Table 4-12 Alternative Measurement on Sustainability Performance ..................... 153

Table 4-13 Sectoral Analysis................................................................................ 155

Table 4-14 Time Stability .................................................................................... 158

Table 4-15 Inclusion of Firm Age as a Control for H3 and H4a ............................. 159

Table 5-1 Summary of Research Questions, Hypotheses and Findings .................. 170

Table 5-2 Summary of Research Conclusions and Implications ............................. 171

x Corporate Sustainability in Australia: Performance, Disclosure and Governance

List of Abbreviations

ASX Australian Securities Exchange

ESG Environmental, Social and Governance

GMM Generalized method-of-moments

PSM Propensity Score Matching

Corporate Sustainability in Australia: Performance, Disclosure and Governance xi

Statement of Original Authorship

The work contained in this thesis has not been previously submitted to meet

requirements for an award at this or any other higher education institution. To the best

of my knowledge and belief, the thesis contains no material previously published or

written by another person except where due reference is made.

Signature:

Date: 13 July 2020

QUT Verified Signature

xii Corporate Sustainability in Australia: Performance, Disclosure and Governance

Acknowledgements

First, I thank my parents and grandparents for their support and love. Since 2009,

it has been a long haul for me to complete my Bachelor, Master and Doctor programs

in Australia. Without their encouragement and support, completion of such a long

journey would have been an impossible mission. I am proud to be the second doctor

in my family, and my mother is the first doctor.

Secondly, I appreciate my principal supervisor, Professor Ellie Chapple, for her

guidance, encouragement and support throughout the entire research journey. I met

Professor Chapple in 2015 when I enrolled in the Master of Business (Research)

program. I am lucky to have Professor Chapple as my supervisor. Her encouragement,

wisdom and advice greatly help me to surmount expected and unexpected challenges

in my research journey. Professor Chapple has also been a role model for me in relation

to how to research, how to write up a paper, and how to communicate with others. In

here, I would like to express my deepest gratitude to Professor Chapple.

Thirdly, I thank my associate supervisor, Dr. Elisabeth Sinnewe, and my external

supervisor, Dr. Shamima Haque. The time and effort which Dr. Elisabeth Sinnewe

devoted to my thesis is unquantifiable. Comments made by Dr. Elisabeth Sinnewe

helped me greatly to improve this thesis. I met Dr. Shamima Haque in 2015 when I

enrolled in the Master of Business (Research) program. Although Dr. Shamima Haque

moved to the United Kingdom in 2017, we still make a great team researching topics

within corporate social responsibility, and I received many comments and help from

her.

Fourthly, I thank my co-researcher and wife, Dr. Jing Jia, for so many things.

My life dramatically changed (in good ways) because of her. I never thought my

Doctor program could grant a degree as well as make me meet my wife. Without her

love and support, my research journey would have been much bumpier and more

challenging.

Fifthly, I thank A/Professor John Nowland and Dr. Ammad Ahmed for their help

and advice in my research journey. It is noteworthy that part of this thesis has been

presented in the 2017 A-CSEAR conference, the 2018 FIRN PhD symposium and the

Corporate Sustainability in Australia: Performance, Disclosure and Governance xiii

2019 APIRA conference. Professor Jacquelyn Humphrey, Professor Charl de Villiers

and other participants also give valuable comments about this thesis.

Sixthly, I also thank my friends at the Queensland University of Technology who

were always there with me sharing support, friendship, knowledge, and locations of

nice restaurants in Brisbane.

Seventhly, I acknowledge the financial support from Australian Government

Research Training Program Scholarship and QUT Excellence Top-up Scholarship.

Last but not least, I thank Clare Moore and Marita Smith for their professional

copy editing and proofreading advice in relation to this thesis.

Chapter 1: Introduction 1

Chapter 1: Introduction

Corporate sustainability has been endorsed by some international organizations,

including the United Nations.1 Academic literature defines corporate sustainability in

different ways. For example, Dyllick and Hockerts (2002, p. 131) define this concept

as “meeting the needs of a firm’s direct and indirect stakeholders ……, without

compromising its ability to meet the needs of future stakeholders as well”; Eccles and

Serafeim (2013, p. 66) connect it with the society: a sustainable firm “creates value for

its shareholders” and leads to a sustainable society; from the broader perspective, Van

Marrewijk and Werre (2003) and Bansal (2005) and Montiel (2008) elaborate it as a

tridimensional construct that include economic prosperity, environmental integrity and

social equity. Many dominant Australian firms, including ANZ and AGL Energy, are

signatories to the UN Global Compact,2 a network that promotes sustainability; the

Australian Securities Exchange (ASX) also joined the Sustainable Stock Exchanges

Initiative that improves transparency of corporate sustainability. Therefore, corporate

sustainability in Australia is expected to continue to grow in importance.

Corporate sustainability performance is defined as “the extent to which a firm

embraces economic, environmental, social and governance factors into its operations,

and ultimately the impact they exert on the firm and society” (Artiach, Lee, Nelson, &

Walker, 2010, p. 32). As Wood (1991a, 1991b, 2010), Tregidga, Milne, and Kearins

(2014), Global Reporting Initiative (2014), Rao and Tilt (2016) and Guthrie (2016)

suggest, there is a relationship between sustainability disclosure and sustainability

performance: disclosure of sustainability information not only mitigates information

asymmetry between firms and their stakeholders but also holds corporate insiders

accountable. Transparency of corporate sustainability connects with sustainability

disclosure.3 It is considered as “communicating an understanding of how the flows of

material, resources and services between corporations, capital markets, society, the

1 The United Nations Global Compact and the Sustainable Stock Exchanges Initiative are backed up

by the United Nations to promote corporate sustainability. 2 More information about the UN Global Compact in Australia can be found on

http://www.unglobalcompact.org.au/ (access date is 1 July 2019). 3 This thesis uses sustainability disclosure and sustainability reporting interchangeably and does not

distinguish the two terms.

2 Chapter 1: Introduction

economy and the environment affect the mutual ability of those systems to continue

and flourish” (Guthrie, 2016, p.11).

Those charged with the governance of a firm are responsible for the operational

decisions affecting firm performance and are also responsible for communicating

aspects of performance to stakeholders. In the area of sustainability performance,

established frameworks of reporting and disclosure are not necessarily mandated, nor

entrenched. Accordingly, reporting and disclosure of sustainability performance is a

governance choice; increasingly observed through governance mechanisms referred to

as sustainability committee4 or chief sustainability officer (Miller & Serafeim, 2015).

By integrating sustainability with corporate governance, the sustainability committee

is expected to focus on (at least some if not all) sustainability issues on the committee’s

agenda. Aiming to advise the board and management about corporate sustainability

(Peters & Romi, 2014, 2015), the sustainability committee has a quite long (but not

necessarily pervasive) history in Australia. For example, as an early adopter, CSR

Limited formed a relevant committee in 1994, and Arrium Limited formed a similar

committee in 2001.

The remainder of Chapter 1 will expand upon this thesis as follows. Regulatory

background regarding corporate sustainability in Australia is detailed in Section 1.1,

and motivations of the thesis are elaborated upon in Section 1.2. Research purposes

and research questions are in Section 1.3. Contributions and practical implications are

explained in Section 1.4. Findings are reported in Section 1.5. Section 1.6 summarizes

this thesis in the ‘Libby Boxes’ format (Libby, Bloomfield, & Nelson, 2002) and a

roadmap. Chapter 2 reviews identified relevant studies.

1.1 REGULATORY FRAMEWORK

Chapter 2 draws on sustainability literature from the US and Europe, whereas

this thesis investigates the Australian market and context. The regulatory framework

in Australia has similarities and differences with both the US and the European Union,

while this thesis elaborates nuances as pertains to Australia’s regulatory environment.

Australia is arguably more aligned to the regulatory environment of the US than of the

4 Alternative names can include “public policy committee, sustainability committee, corporate social

responsibility committee, environmental health and safety committee, etc” (Peters & Romi, 2015, p.

173).


European Union, as the latter is more stringent.5 Internationally mandating

sustainability disclosure, Directive 2014/95/EU has been introduced and enforced by

the European Union, and Directive 2014/95/EU deals with a range of sustainability

issues, including health and safety, pollution emissions, and charity. In contrast, the

US does not impose such comprehensive mandate on sustainability disclosure, and

issue-specific mandates are introduced, including California Transparency in the

Supply Chain Act. In relation to the Asia-Pacific region, several countries use

comprehensive mandate on sustainability disclosure to improve the transparency of

corporate sustainability. For example, Hong Kong introduced mandatory sustainability

disclosure in 2016, namely Appendix 27 of Main Board Listing Rules and Appendix

20 of GEM Listing Rules. Thus, compared with firms operating in the European Union

and the Asia-Pacific region whose regulatory environment is more stringent,

Australian firms remain largely subject to discretionary and voluntary choices in terms

of corporate sustainability disclosure. Although Australian firms do not have

comprehensive mandate on sustainability disclosure, they still face some issue-specific

mandates, which are discussed in the following paragraph. I discuss the Australian

regulatory framework in two parts, one component focuses on sustainability disclosure

and the other on corporate governance and sustainability.

Sustainability disclosure remains voluntary in Australia, and the regulations

regarding sustainability disclosure are evolving. Section 299(1)(f) of the Corporations

Act 2001 was introduced in 1998 to require firms to disclose activities subject to

environmental regulations. Frost (2007) highlights that this section still leaves much

discretionary leeway for managers. Introduced in 2011, Section 1013DA of the

Corporations Act 2001 focuses on product disclosure statements, requiring financial

product issuers to disclose whether labour standards as well as environmental, social

or ethical considerations were considered in the selection, retention or realisation of

the investment. Section 299A of the Corporations Act 2001 was added in 2013, to

require public firms to present their operating and financial review in their directors’

5 United Nations Environment Programme and KPMG (2006) and United Nations Environment

Programme, KPMG, Global Reporting Initiative, and Centre for Corporate Governance in Africa

(2010, 2013, 2016) suggest that firms in the European Union are subject to more stringent regulations

regarding corporate sustainability, and firms in the US are more flexible regarding how to practice and

disclose sustainability. Information about Directive 2014/95/EU can be found at https://eur-

lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014L0095 (access date is 12 June 2020).


reports. The regulatory guide released by the Australian Securities and Investments

Commission articulates: operating and financial review shall contain environmental

and other sustainability risks that may be financially material (see Regulatory Guide

247). Regulatory guides 68 and 65, corresponding to Section 299(1)(f) and 1013DA,

were also issued. It is reasonable to argue that firms in Australia have much discretion

in whether, what and how to disclose sustainability performance.

Regulations with regard to sustainability disclosure outside of corporate reports

are relevant. For example, the National Pollutant Inventory was established in 1998 to

ask operators of all facilities that emit above minimum threshold levels to submit

annual reports which quantify their emissions of various land, air and water pollutants.6

Another example is the National Greenhouse and Energy Reporting Act 2007 – this

Act requires facilities that emit above certain levels of greenhouse gas to report their

emissions.7 In summary, firms need to report their environmental impact to regulators,

if they are above a designated threshold. The social impacts of corporate activities are

also reportable. The Workplace Gender Equality Act 2012 requires firms with 100 or

more staff to submit reports about gender diversity in their workforce.8

To a quite limit extent, financial reporting standards may incidentally require

sustainability disclosure. For example, AASB 6 and 137 are relevant to mining firms,

requiring recognition and disclosure of the restoration costs due to abandoned mine

sites. Thus, this thesis suggests while Australian firms are currently subject to select

regulations about sustainability disclosure, firms continue to retain some flexibility

regarding the scope and content of such disclosure.

The integration of sustainability and corporate governance remains on the

agenda of Australian legislators. An early example of attempts at such integration is

the Corporate Code of Conduct Bill 2000 that attempts to regulate how firms conduct

their business in a socially responsible manner overseas, and it was eventually rejected

in 2002. In 2006, whether and how to better integrate sustainability with corporate

6 More information about the National Pollutant Inventory can be found on http://www.npi.gov.au/

(access date is 1 July 2019). 7 More information about the National Greenhouse and Energy Reporting Act 2007 and Clean Energy

Regulator can be found on http://www.cleanenergyregulator.gov.au/NGER (access date is 1 July

2019). 8 More information about the Workplace Gender Equality Act 2012 and Workplace Gender Equality

Agency can be found on https://www.wgea.gov.au/about-the-agency (access date is 1 July 2019).


governance was raised by two committees, namely the Parliamentary Joint Committee

on Corporations and Financial Services9 and Corporations and Markets Advisory

Committee10, and no changes to corporate law were recommended at that time. In

2014, the Governance Institute of Australia11 again invited discussion about whether

clarifications to the relationship between the interests of shareholders and interests of

the corporation should be explicitly made in corporate law, although no actions or

changes followed. Deva (2011) suggests that absence of clarity about the duties of

directors and purpose of the corporation defy attempts to integrate sustainability with

corporate governance at corporate law level. A survey conducted by Anderson et al.

(2006) identifies directors often hold quite diverse and inconsistent views regarding

their duties. To summarise, this thesis suggests that whether and how to integrate

sustainability with corporate governance is largely determined by board of directors in

firms with discretion, and corporate law (nor other regulation) does not explicitly

regulate how firms regard sustainability.

In summary, the regulatory framework in Australia is introduced in two parts:

how sustainability disclosure is regulated, and how sustainability is considered at the

level of corporate law and other regulations. Compared with countries which impose

stringent regulations on sustainability disclosure (e.g. South Africa and the European

Union), Australia grants flexibility in scope and content of sustainability disclosure to

firms. Aligning with other countries (Sjåfjell et al., 2015), Australia does not position

sustainability in corporate governance at the level of corporate law. This thesis argues

that Australian firms have freedom to corporate sustainability. Motivations of this

thesis are elaborated in following section.

1.2 RESEARCH MOTIVATIONS

Policy discussion regarding sustainability disclosure in Australia attracts greater

global scrutiny. Some exchanges in the Asia-Pacific region, including the Hong Kong

Exchange, Singapore Exchange and Taiwan Stock Exchange, have recently mandated

9 This committee published a report, Corporate Responsibility: Managing Risk and Creating Value, in

2006. 10 This committee released a report, The Social Responsibility of Corporations, in 2006. 11 This organization published another report, Shareholder Primacy: Is There a Need for Change, in

2014.


sustainability disclosure.12 In Australia, two industry bodies have issued sustainability

disclosure guides.13 More countries, including Argentina and the European Union,

have mandated sustainability disclosure in small and medium-sized firms above a set

of legal threshold.14 Following this momentum of mandated disclosure15, legislators,

regulators, and market operators in Australia are considering whether and how to alter

the current regulatory framework.

The Senate Economics References Committee16 and Australian Securities and

Investments Commission17 emphasize sustainability, climate change and its negative

effects on firms, in their recent public reports. Highlighting concerns of legislators and

regulators, as commissioner of the Australian Securities and Investments Commission,

John Price discusses corporate sustainability as part of directors’ duties and encourages

firms to take into account sustainability in their decision making (McLeod & Hurley,

2018). The fourth edition of Corporate Governance Principles and Recommendations

of the ASX mentions ‘long term sustainable value’ and ‘standing in the community’

to encourage a corporate culture of ‘acting lawfully, ethically and responsibly’.18 Thus,

in examining sustainability disclosure and the role of governance mechanism (the

board committee) regarding sustainability performance, this thesis associates with the

current silo of literature about corporate sustainability in Australia, contributing to this

policy discussion.

As socially responsible/ ethical investment assets in Australia and New Zealand

increased by 247% from 2014 to 2016 to reach $516 billion (Foo, 2017), a reasonable

expectation is that corporate sustainability will attract increasing attention in the future.

Three reasons drive this boom of socially responsible investments in Australia. First,

12 See Listing Rules of corresponding exchanges. 13 Two versions are issued by the Financial Services Council and Australian Council of

Superannuation Investors, one in 2011 and the other in 2015. 14 See the Ley Nº 2594 de Balance de Responsabilidad Social y Ambiental (BRSA) and Directive

2014/95/EU. 15 According to United Nations Environment Programme and KPMG (2006) and United Nations

Environment Programme et al. (2010, 2013, 2016), there is indeed a trend of mandatory disclosure of

corporate sustainability. A recent example is the European Union that mandates disclosure of corporate sustainability in its members. 16 This committee published a report, Carbon Risk: A Burning Issue, in 2017. 17 As the market regulator in Australia, the Australian Securities and Investments Commission

released a report, Climate Risk Disclosure by Australia’s Listed Companies, in 2018. 18 The fourth edition of Corporate Governance Principles and Recommendations of the ASX can be

downloaded from https://www.asx.com.au/regulation/corporate-governance-council.htm (access date

is 10 August 2019).


new legislations discussed at Section 1.1, including Section 1013DA and Section 299A

of the Corporations Act 2001, promote investors’ and fund managers’ awareness about

socially responsible investment (Foo, 2017). Secondly, the third edition of Corporate

Governance Principles and Recommendations issued by the ASX further promotes this

awareness by suggesting that listed firms need to evaluate their own exposure to risks

of corporate sustainability and communicate how they manage these risks (Foo, 2017).

Thirdly, this boom of socially responsible investments in Australia also mirrors the

global trend of socially responsible investment (Jones, et al., 2008; Foo, 2017). Pérez-

Gladish, Benson, and Faff (2012), surveying investors sensitive to social responsibility

in Australia, and Eccles, Kastrapeli, and Potter (2017), surveying investors in multiple

countries, identify an upward trend of socially responsible investment and indicate that

investors consider low quality of sustainability disclosure as a key obstacle. Therefore,

greater demand for socially responsible investment needs better disclosure to improve

market efficiency. In this context, Australian firms are expected to prepare more and

better sustainability disclosure. Interviewing stakeholders, KPMG and SustainAbility

(2008) and EY and Global Reporting Initiative (2013) find that more stakeholders

focus on how sustainability is integrated with corporate governance. Thus, examining

corporate sustainability disclosure, the role of the board committee as to sustainability

and sustainability performance, this thesis contributes to the interests of stakeholders:

(1) the reflection as to relationships between disclosure and performance sheds light

on the disclosure quality, a concern to stakeholders; (2) the sustainability committee

may be a solution to integrating sustainability into corporate governance, providing

another perspective to stakeholders in corporate sustainability.

Corporate sustainability generates practitioner and academic research; the extant

literature provides fresh research opportunities. The global surveys of KPMG (2013,

2015, 2017) and the local surveys conducted by Australian Council of Superannuation

Investors (2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017) reveal that more

Australian firms are engaging in sustainability disclosure over time. Using the Global

Reporting Initiative (GRI), Frost, et al. (2005) and Beck, Frost, and Jones (2018) assess

sustainability disclosure by matching disclosure content with the GRI criteria. Taken

together, prior literature19 is interested in research questions about content (e.g. which

19 Readers may refer to Chapter 2 for more information.


sustainability themes are reported on, and how much information is released in each

theme). While linguistic characteristics of disclosure have been frequently investigated

in accounting and finance literature, the characteristics in sustainability disclosure are

largely omitted. Identifying this literature gap, Beattie, McInnes, and Fearnley (2004),

Cho, Roberts, and Patten (2010), Beattie (2014), Jain and Jamali (2016) and Loughran

and McDonald (2016) suggest that the literature could benefit from linguistic analysis

of sustainability disclosure, as linguistic analysis can provide additional insights about

how firms communicate their sustainability performance. My thesis aims to contribute

to addressing this literature gap and is motivated to augment prior literature by

investigating sustainability disclosure characteristics using various linguistic

characteristics.

While many studies investigate how corporate governance affects sustainability,

few studies consider specifically how board committees relate to firms’ sustainability

performance (Jain & Jamali, 2016; Walls, Berrone, & Phan, 2012). A research gap of

this group of studies, including Rodrigue, Magnan, and Cho (2013) and Dixon-Fowler,

Ellstrand, and Johnson (2017), is that rich characteristics of sustainability committee,

including composition, authority, resources, and diligence, have been omitted. For

example, in Australian literature, Rankin, Windsor, and Wahyuni (2011) analyse how

the presence of sustainability committee relates to disclosure of carbon dioxide

emissions, revealing that simply the existence of committee does not affect how

Australian firms disclose relevant information. Thus, other meaningful characteristics

of the committee largely are omitted. Following the encouragement of Peters and Romi

(2014, 2015) as well as Dixon-Fowler et al. (2017), my thesis aims to contribute to

addressing this literature gap by investigating the sustainability committee in Australia

with two measures, one focuses on the committee’s presence and the other on

committee effectiveness based on various committee characteristics.

In summary, there are three motivations for this thesis. First, it is motivated by

current and anticipated changes to the regulatory framework in Australia, contributing

to relevant policy discussion. Secondly, it is motivated by the trend that corporate

sustainability continues to grow in importance, delivering the information that matters

to stakeholders. Thirdly, the thesis is motivated by research opportunities highlighted

in prior literature, utilizing linguistic analyses in exploring dimensions of disclosure

and better understanding the role of the sustainability committee in driving corporate


sustainability performance. The research purpose and questions are discussed in the

following section.

1.3 RESEARCH PURPOSE AND QUESTIONS

1.3.1 Research Purpose

This thesis aims to examine linguistic characteristics of sustainability disclosure,

firms’ experience of sustainability disclosure and the role of sustainability committees,

which are related to corporate sustainability performance. To be specific, seven textual

characteristics include how much sustainability information, quantitative information

and information about environmental impact are disclosed, to what extent disclosure

is readable, and to what extent disclosure is communicated in optimistic, certain and

clear tones; experience of disclosure is operationalized as number of years that a firm

has disclosed sustainability information; the ESG ratings from the Thomson Reuters

Asset4 (Asset4) are operationalized as sustainability performance; two elements of the

sustainability committee, namely presence and effectiveness, are considered.

This thesis examines these seven textual characteristics for two reasons. First, as

many studies (Cho et al., 2010; Lehavy, Li, & Merkley, 2011; Loughran & McDonald,

2014a; Parker, 2011) suggest, this PhD thesis researches the most frequently-examined

textual characteristics. Secondly, I use Diction 7. The availability of word dictionaries

and analytical software affect which textual characteristics that can be examined. The

ESG ratings from Asset4 are a legitimate data source for sustainability performance,

as demonstrated in many seminal studies (Cheng, Ioannou, & Serafeim, 2014; Ioannou

& Serafeim, 2014, 2016; Lys, Naughton, & Wang, 2015). As DeZoort, Hermanson,

Archambeault, and Reed (2002) instruct, this thesis defines an effective committee as

one that consists of competent members with authority and resources to facilitate board

and management decisions regarding sustainability practices via diligent oversight

efforts and advice.

In summary, selection of which textual characteristics of disclosure are analysed

is decided by prior literature and pragmatic limitations. Use of the Asset4 ESG ratings

follows seminal studies. A focus on the sustainability committee is motivated by

opportunities in prior literature and the rich history of this committee in Australia.

Research questions of this thesis are presented in following section.


1.3.2 Research Questions

Three research questions are proposed in relation to the research purpose.

1) Whether and how is an Australian firm’s sustainability

performance associated with its sustainability disclosure?

2) How is experience of disclosure (i.e. number of years as to

sustainability disclosure) related to sustainability performance?

3) How is the sustainability committee related to sustainability

performance? This is operationalized as:



b. How is the effectiveness of the sustainability committee

related to sustainability performance?

Regarding the seven textual characteristics, this thesis classifies them to into

three categories. In terms of the extent that sustainability disclosure is readable, this

characteristic can be considered as readability. It reflects costs incurred by readers to

process and interpret disclosure (Lehavy et al., 2011). As tone of language can be

broadly defined as “the affect or feeling of a communication” (Henry, 2006, p. 376),

this thesis groups optimism (Henry & Leone, 2016), certainty (Cho et al., 2010) and

clarity (Resche, 2004, 2015) as tone of language. The remaining characteristics,

namely the amount of disclosure, amount of quantitative information and amount of

information as to environmental impact, are related to the content of sustainability

disclosure. As Hooks and van Staden (2011) and Nazari, Hrazdil and Mahmoudian

(2017) suggest, the amount of disclosure (quantified as the number of words) can be

linked with disclosure comprehensiveness, and environmental-impact information and

quantitative information relate to the content of disclosure.

The purpose of this research and questions are tabulated in Table 1-1. Disclosure

characteristics with regard to content and tones are answered in H1, and readability is

answered in H2 within RQ1. H3 is developed to answer RQ2. H4a and H4b are used

to answer RQ3a and RQ3b, respectively. I acknowledge that this classification in the

previous paragraph is likely challengeable. For example, the amount of sustainability

disclosure arguably relates to readability (Loughran & McDonald, 2014a). Vagueness

or ambiguousness is the opposite of clarity (Resche, 2004, 2015), and may also relate


to readability. As all seven textual characteristics are included in Chapter 3, how they

are classified does not affect what has been found or how to interpret those findings.

Contributions of these topics to this thesis are explained in following section.


Table 1-1 Summary of Key Components in this Thesis

Research Question

Relevant

Chapter

Hypothesis Theory

Dependent

Variable

Independent

Variable Key Papers

Q1 Whether and how is an

Australian firm’s sustainability

performance

associated with its

sustainability

disclosure?

3 H1 There is no relationship

between sustainability performance and six

textual characteristics of

sustainability disclosure:

a) amount of

information (measured

in number of words),

b) amount of

quantitative information

(measured by the

Diction 7),

c) amount of

environmental impact information (measured

in number of words),

d) tone of optimism

(measured by the

Diction 7),

e) tone of certainty

(measured by the

Diction 7), and

f) tone of clarity

(measured by the

Diction 7).

Signalling theory,

institutional theory and Bloomfield’s

(2002, 2008)

incomplete revelation

hypothesis

Seven textual

characteristics of sustainability

disclosure

Sustainability

performance

Cho et al. (2010),

Clarkson, Overell, and Chapple (2011),

Herbohn, Walker, and

Loo (2014), Arena,

Bozzolan, and Michelon

(2015) and Wang, Hsieh,

and Sarkis (2018)


Research Question

Relevant

Chapter

Hypothesis Theory

Dependent

Variable

Independent

Variable Key Papers

H2 Readability of

sustainability disclosure

is positively related to

sustainability

performance.

Q2 How is experience of

sustainability

disclosure related to

sustainability

performance?

4 H3 There is a positive

relationship between a

firm’s sustainability

performance and its

experience of

sustainability disclosure.

Institutional theory Sustainability

performance

Experience of

sustainability

disclosure

Edelman (1992) and

Chandler (2014)

Q3a How is the presence of

a sustainability

committee related to

sustainability

performance?

4 H4a There is no relationship

between the presence of

a sustainability

committee and

sustainability

performance.

Greenwashing

argument and

stewardship theory

Sustainability

performance

Presence of a

sustainability

committee

Forbes and Jermier

(2011) and Rodrigue et

al. (2013)

Q3b How is the

effectiveness of the

sustainability

committee related to


4 H4b There is a positive

relationship between

sustainability committee

effectiveness and

sustainability performance.

Resource dependency

theory

Sustainability

performance

Sustainability

committee

effectiveness

DeZoort et al. (2002)


1.4 CONTRIBUTIONS

1.4.1 Research Contributions

First, how sustainability disclosure is related to sustainability performance has

been investigated by many studies. For example, Ingram and Frazier (1980) narrowed

the research scope to environmental disclosure and environmental performance in the

US, analysing a sample (1970-1974) to examine this relationship. Such correlation has

also been examined by Australian researchers. For example, Guthrie and Parker (1989)

analysed the sustainability reports of a mining firm (BHP Billiton) between 1885 and

1985, and Deegan, Rankin, and Tobin (2002) analysed reports of BHP Billiton from

1983 to 1997. This silo of literature renders conflicting results in this regard, and these

conflicting results may be attributed to different reasons, including different research

analysis, sample selection and methods of coding environmental disclosure. Instead of

reconciliating the results in prior literature, this thesis contributes to prior literature by

using a different analytical lens, namely linguistic analysis. As Beattie et al. (2004)

and Beattie (2014) encourage, this thesis investigates sustainability disclosure using

linguistic characteristics that have previously been omitted from the literature yet are

frequently examined in accounting and finance literature.

Three US studies, namely Cho et al. (2010), Arena et al. (2015) and Wang et al.

(2018), examine one or two linguistic characteristic(s) of sustainability disclosure (i.e.

optimistic tone and readability). Extending their work, this thesis improves linguistic

analysis of corporate sustainability disclosure in four way. (1) Sustainability disclosure

in different mediums (annual report and standalone report) are included, rather than

only annual reports. (2) Social and environmental reports are included, rather than only

environmental reports. (3) Firms in different industries over 15 years are sampled,

rather than multiple industries in a shorter period. (4) Multiple linguistic characteristics

are investigated at the same time, rather than only a single characteristic. This thesis

therefore provides a more inclusive view of the relationship between performance and

textual characteristics of disclosure, making findings more robust.

Secondly, while the relation between corporate governance and sustainability

has been discussed in a number of studies (Jain & Jamali, 2016), board committees are

less frequently discussed. As a board of directors delegates issues to committees (Reeb

& Upadhyay, 2010), a sustainability committee would exert influence on sustainability


performance, acting as nexus between a firm and its own sustainability issues. This

thesis argues that there are many research opportunities in this area of literature. For

example, in relation to sustainability performance, Rodrigue et al. (2013) found no

demonstrable impact of sustainability committee on environmental performance, yet

Dixon-Fowler et al. (2017) found evidence of the positive effects of such a committee

on environmental performance; Peters and Romi (2014, 2015) revealed a sustainability

committee is positively related to the use of assurance services; Liao, Luo, and Tang

(2015) found that this committee is positively related to disclosure of greenhouse gas

emissions. A research gap of this group of studies is that rich characteristics of

sustainability committee (e.g., composition, authority, resources, and diligence), are

largely omitted. My thesis contributes to this expanding field in three ways. (1)

Extending prior studies, it examines various meaningful characteristics of

sustainability committee, including who sit on the committee, and how the committee

members are organized. (2) Aligning with prior literature, it examines the relationship

between the sustainability committee on sustainability performance with a panel data

drawn from firms in various industries. (3) Arguably, there is an absence of relevant

research outside of the US. Rankin et al. (2011) examine how the presence of

sustainability committee affects disclosure of greenhouse gas emissions in Australia.

Extending their work, this thesis examines the sustainability committee from multiple

aspects and different themes of sustainability performance.

1.4.2 Theoretical Contributions

The thesis considers the arguments of several theories, as showed in Table 1-1.

First, following prior studies of how sustainability disclosure relates to sustainability

performance (Clarkson, Li, Richardson, & Vasvari, 2008), Chapter 3 incorporates two

theories, namely signalling theory and institutional theory. Differing from prior

studies, the thesis considers the theories from linguistic perspectives. Secondly, in

relation to readability of sustainability disclosure (a specific linguistic characteristic of

sustainability disclosure examined in Chapter 3), a specific argument is embraced,

namely the incomplete revelation hypothesis (Bloomfield, 2002, 2008), following the

literature of readability of financial information. Extending the hypothesis, this thesis

introduces it into the sustainability literature. Taken together, Chapter 3 assesses which

theories support the findings in the context of linguistic characteristics of sustainability

disclosure and sustainability performance.


Thirdly, following prior studies of corporate governance and sustainability, I use

theories to develop hypotheses about H3. For example, the greenwashing argument

from Forbes and Jermier (2011) is used. It argues that corporate governance measures

addressing sustainability (e.g., sustainability committee) tend to be symbolic and lack

substantial effects on sustainability performance. I test this argument with a set of

panel data of sustainability committee in Australia. Fourthly, Chapter 4 includes two

complementing theories, stewardship theory and resource dependency theory, to

interpret findings about the sustainability committee. Thus, Chapter 4 assesses which

the aforementioned theories support the findings in the context of sustainability

committee. Fifthly, institutional theory is considered in Chapter 4 to develop

hypotheses about H2 and to interpret the relationship between firms’ experience of

sustainability disclosure and sustainability performance.

1.4.3 Practical Contributions

This thesis contributes to discussion and debate about anticipated changes to the

regulatory framework in Australia. Findings delivered by this thesis facilitate policy

discussion about how to improve this regulatory framework and therefore encourage

Australian firms to be more sustainable. Second, findings rendered by this thesis

arguably appeal to stakeholders interested in corporate sustainability. For instance,

investors who are interested in socially responsible investing may find this thesis’s

findings useful, as it examines how firms disclose sustainability and utilise a

sustainability committee; as the accounting profession is interested in providing

assurance services regarding sustainability disclosure (Global Reporting Initiative,

2013a), knowledge about corporate sustainability is perceived to improve quality of

assurance services; financial analysts that are interested in socially responsible

investing may find the thesis useful, as it examines the sustainability committee, a

nexus between board of directors/senior management and sustainability issues. Third,

from a broad aspect, this thesis aligns with Bowen (2014) who argues that symbolic

action has social cost; as the resources devoted to potentially symbolic actions, such

as sustainability disclosure and sustainability committee, ought be switched to

substantial action. Even though the resources devoted to sustainability disclosure and

the sustainability committee are bearable by each firm, such resources collectively

could be substantial to society. If they do not deliver substantial benefits to society, it

may be reasonable to reorientate resources to more productive places.


In summary, this thesis delivers practical implications in two ways. First, as its

findings suggest, future regulatory framework can pay more attention on readability

of sustainability disclosure. Secondly, as this thesis demonstrates the positive effects

of a sustainability committee on environmental performance, this committee can offer

an opportunity for firms that want to better integrate sustainability with corporate

governance.

This thesis also contributes to prior literature. It enriches knowledge in two key

silos of corporate sustainability, namely the sustainability committee and sustainability

disclosure, using innovative analytical techniques and better research designs. Further,

it considers the arguments of different theories. Findings of the thesis are summarized

in following section.

1.5 SUMMARY OF THE FINDINGS

The first research question is about whether and how an Australian firm’s

sustainability performance is associated with its sustainability disclosure. Analysing

2,076 firm-year observations between 2002 and 2016, this thesis finds a positive

correlation between selected textual characteristics and sustainability performance. In

other words, good performers release more sustainability disclosure, more quantitative

information, more environmental-impact information and present in optimistic, certain

and clear tones. Analysing 2,067 firm-year observations (2002 – 2016), this thesis

demonstrates that good performers communicate in a more readable way.

Extending prior literature, this thesis performs some robustness tests, including

an alternative performance measurement (by principal component analysis), disclosure

channels, sectoral environment, the Granger causality tests in relation to dependent

and independent variables, and time stability. Findings rendered by main analysis

remain qualitatively unchanged when compared with an alternative performance

measurement. As sustainability disclosure is extracted from a standalone report or

annual report, it is interesting to see whether the findings are affected by disclosure

channels. This thesis reveals different channels do influence relationships between

textual characteristics and performance. In terms of sectoral environments, this thesis

shows that different sectoral environments affect how sample firms communicate

sustainability. As this thesis includes a sample period of 15 years, it was interesting to

check if findings remained stable over time. Different sample periods are found to


affect the relationship between textual characteristics and performance. The Granger

causality tests confirm that textual characteristics in one period do not relate to

performance in the next period, and vice versa.

The second research question asks how firms’ experience of disclosure is related

to their sustainability performance. Analysing 2,076 firm-year observations from 2002

to 2016, this thesis reveals a positive relationship between experience of disclosure

and performance. The third research question asks how the sustainability committee is

related to sustainability performance. Analysing 2,166 firm-year observations based

on the same period, this thesis finds that there is a positive relationship between the

existence of a sustainability committee and sustainability performance; sustainability

committee effectiveness is positively related to environmental performance.

Extending prior literature, this thesis performs some robustness tests, including

endogeneity, alternative performance measurements (nine sub-categories of the ESG

ratings), sectoral environment and time stability. Regarding endogeneity, dynamic

generalised-method-of-moments (GMM) and propensity score matching (PSM) are

used, and findings rendered by this thesis remain qualitatively unchanged. Regarding

alternative performance measurements, the findings remain qualitatively unchanged.

In terms of sectoral environment, I find that different sectoral environment influences

effects of sustainability committee on performance. As this thesis includes 15 years in

sample period, it is interesting to check whether findings remain stable over time.

Different sample periods are found to not affect the relationship between committee

and performance. This thesis’s structure is presented in following section.

1.6 THESIS OUTLINE

Chapter 1 presents an overview of this thesis. Chapter 2 discusses various silos

of literature that are related to research questions. Chapters 3 and 4 execute the research

designs to answer research questions proposed in Chapter 1. Chapter 5 concludes this

thesis by summarizing Chapters 2, 3 and 4, whilst discussing limitations and avenues

for future research. As Libby, Bloomfield and Nelson (2002) suggest, ‘Libby Boxes’

are presented in Figure 1-1 to demonstrate research designs, and Figure 1-2 follows to

provide a roadmap.


Figure 1-1 Libby Boxes for Research Questions






Figure 1-2 Thesis Roadmap

Chapter 2: Literature Review 27

Chapter 2: Literature Review

As mentioned in Section 1.4.2, there are many studies that investigate corporate

sustainability from diverse perspectives in countries. Prior studies specifically relevant

to Chapters 3 and 4, respectively, are reviewed in each chapter, and other studies are

reviewed in Chapter 2 to facilitate understanding about how this thesis is positioned

within wider literature surrounding corporate sustainability. Chapter 2 discusses the

pertinent studies regarding sustainability disclosure and sustainability performance in

Section 2.1. Linguistic studies about financial information that inspired this thesis are

discussed in Section 2.2. Section 2.3 considers studies of corporate governance and

sustainability performance, and Section 2.4 reviews studies specific to governance and

sustainability disclosure. Section 2.5 accounts recent literature development from 2014

to 2018 in Australia. Chapter 3 reports original research into textual characteristics of

disclosure and performance.

2.1 SUSTAINABILITY DISCLOSURE AND SUSTAINABILITY

PERFORMANCE

If sustainability disclosure is defined as the “process of communicating the social

and environmental effects of organisations” (Gray, Owen & Adams, 1996, p.3), it and

sustainability performance ought to be coupled – the former should present a true and

fair view of the latter. But prior studies in diverse countries seem to contradict this

idea. Section 2.1 tabulates seminal studies into the relationship between sustainability

disclosure and sustainability performance.

28 Chapter 2: Literature Review

Table 2-1 Overview of Seminal Studies about the Relationship between Sustainability Disclosure and Sustainability Performance Author(s) –Year Country Measurement on Sustainability

Disclosure

Measurement on Sustainability Performance Result

Panel A – Environmental Disclosure and Environmental Performance

[1] Ingram and Frazier

(1980)

US Environmental disclosure – extent of

disclosure

Environmental performance – CEP indices None

[2] Freedman and Jaggi

(1982)


pollution disclosure


[3] Deegan and Rankin

(1996)

Australia Environmental disclosure – length of

disclosure

Environmental performance –success of prosecution Negative

[4] Fekrat, Inclan, and

Petroni (1996)

18 countries Environmental disclosure – extent of

disclosure


[5] Brown and Deegan

(1998)

Australia Environmental disclosure – length of

disclosure

Environmental performance –number of media articles

reporting on corporate environmental performance

Negative

[6] Neu, Warsame, and

Pedwell (1998)

Canada Environmental disclosure – length of

disclosure

Environmental performance – environmental fines levied

against firm and number of articles that had environmental

criticisms of corporate activities

Positive and

Negative


Author(s) –Year Country Measurement on Sustainability

Disclosure


[7] Cormier and Magnan

(1999)

Canada Environmental disclosure – extent of

disclosure

Environmental performance – excess pollution, fines and

penalties, orders to conform or legal actions

None

[8] Hughes, Anderson,

and Golden (2001)


disclosure


[9] Patten (2002) US Environmental disclosure – extent of

disclosure

Environmental performance – toxic release inventory

adjusted by revenue

Negative

[10] Al-Tuwaijri,

Christensen, and Hughes

(2004)


disclosure

Environmental performance –ratio of toxic waste recycled

to total toxic waste generated

Positive


(2004)


climate change disclosure

Environmental performance – actual emissions Positive

[12] Cho and Patten

(2007)


disclosure

Environmental performance – 2002 KLD ratings Negative

[13] Clarkson et al.

(2008) US Environmental disclosure – extent of

disclosure

Environmental performance – toxic release inventory

adjusted by sales Positive



Disclosure


[14] Aerts and Cormier

(2009)

US and Canada Environmental disclosure – extent of

disclosure

Environmental performance – toxic release inventory None


(2009)

European Union,

Japan and Canada

Environmental disclosure – extent of

disclosure

Environmental performance – carbon emission None

[16] Cho et al. (2010) US Environmental disclosure – tone of

language

Environmental performance – 2002 KLD ratings Negative

[17] Clarkson et al.

(2011)

Australia Environmental disclosure – extent of

disclosure

Environmental performance – pollution propensity Positive

[18] De Villiers and van

Staden (2011)

US Environmental disclosure – length of

disclosure

Environmental performance – KLD and toxic release

inventory

Negative

[19] Kim and Lyon

(2011)

US Environmental disclosure – reported

emissions under the section 1605(b) of the

Energy Policy Act 1992

Environmental performance – actual emissions Negative

[20] Toffel and Short

(2011) US Environmental disclosure – whether a

facility voluntarily discloses to the

Environmental Audit Policy

Environmental performance – abnormal release of toxic

chemicals Positive



Disclosure


[21] Cho, Freedman, and

Patten (2012)

US Environmental disclosure – disclosure of

environmental capital spending amount

Environmental performance – changes in toxic release

inventory

Negative

[22] Cho, Guidry,

Hageman, and Patten

(2012)


disclosure

Environmental performance – environmental impact score

reported by Newsweek

Negative

[23] Hassan and Kouhy

(2013)

Nigeria Environmental disclosure – length of

disclosure

Environmental performance – carbon emissions None

[24] Luo and Tang

(2014)

US, UK and

Australia

Environmental disclosure –under CDP intensity of emissions and carbon mitigation under CDP Positive

[25] Herbohn et al.

(2014)

Australia Environmental disclosure – extent of

disclosure

Environmental performance – information extracted from

corporate disclosure

Positive

[26] Meng, Zeng, Shi,

Qi, and Zhang (2014)

China Environmental disclosure – extent of

disclosure

Environmental performance – firms listed by Ministry of

Environment as serious offenders

Non-linear

[27] Arena et al. (2015) US Environmental disclosure – tone of

language

Environmental performance – number of environmental

concerns listed by KLD Positive



Disclosure


[28] Cormier and

Magnan (2015)

Canada and US Environmental disclosure – extent of

disclosure

Environmental performance – toxic release inventory and

national pollution release inventory

None

[29] Braam, de Weerd,

Hauck, and Huijbregts

(2016)

Netherland Environmental disclosure – extent of

disclosure

Environmental performance – greenhouse gas emissions,

production of waste and total water consumption

Negative

Panel B – Sustainability Disclosure and Sustainability Performance

[30] Lanis and

Richardson (2012a)

Australia Sustainability disclosure – length of

disclosure

Tax aggressiveness – a firm has been accused of tax

aggressiveness by the ATO, resulting in the issue of an

amended tax assessment

Positive

[31] Lanis and

Richardson (2012b)

Australia Sustainability disclosure – extent of

disclosure

Tax aggressiveness – a firm’s effective tax rate Positive

[32] Wang et al. (2018) US Sustainability disclosure – readability of

disclosure

CSR performance – ESG and KLD ratings Positive


Table 2-1 includes several prior studies that examined the relationship between

sustainability disclosure and sustainability performance. As indicated in this table, this

chapter suggests that they focus on thematic content in disclosure, and other disclosure

characteristics are comparatively omitted in the literature. Of the studies analysed in

this table, eight investigate this relationship in Australia. Five studies, [17], [24], [25],

[30] and [31], found a positive relationship, and three, [3], [4] and [5], concluded with

a negative result no correlation at all. Such non-consensus status is also reflected by

studies conducted in other countries. For example, of the 14 studies investigating the

US data, only five conclude a positive relationship. Literature-review or meta-analysis

studies were consulted to see how this relationship is reflected in the wider literature.

Ullmann (1985) included seven studies about this relationship and found that

contradictory results can be due to an absence of theory, inappropriate definitions or

lack of empirical data. Berthelot, Cormier, and Magnan (2003) and Alrazi, De Villiers,

and van Staden (2015) document that this relationship is negative. Following analysis

of 186 studies over decades, Fifka (2012, 2013) concluded that the available literature

produces mixed results regarding this relationship. Synthesizing 178 studies from 1999

to 2011, Hahn and Kühnen (2013, p. 16) confirm Fifka’s (2012, 2013) conclusion and

suggest further studies are encouraged to understand whether sustainability disclosure

“conveys a true and fair view of corporate sustainability performance”.

In summary, as Table 2-1 suggests, there is an extant mature body of literature

investigating the relationship between sustainability disclosure and sustainability

performance. But prior studies do not reach a clear consensus about this important

topic, leaving many opportunities for future studies. Chapter 3 further investigates this

body of studies. Linguistic studies into readability and tone of language in financial

information are reviewed in Section 2.2.

2.2 LINGUISTIC STUDIES ABOUT FINANCIAL INFORMATION

As suggested by Li (2010b) and Loughran and McDonald (2016), the linguistic

studies into financial information have been identified. In addition to thematic content

of sustainability disclosure, this thesis also considers two linguistic characteristics (i.e.

readability and tone of language) of disclosure. Thus, the linguistic studies into the two

characteristics in financial information are discussed, respectively.


2.2.1 Readability

As a linguistic phenomenon, readability has a long history (DuBay, 2004). It has

long been investigated by researchers in the field of accounting. For example, Smith

and Smith (1971) measure the readability of annual reports made by US firms. As

defined in Dale and Chall (1949, p. 5), readability concerns “the sum total (including

all the interactions) of all those elements within a given piece of printed material that

affect the success a group of readers have with it. The success is the extent to which

they understand it, read it at an optimal speed, and find it interesting”. Within the field

of accounting, Lehavy, Li, and Merkley (2011, p. 1091) define it as “the costs incurred

by users to process and interpret a firm’s written communication”.

There are two stages in the development of readability studies in the accounting

literature (Loughran & McDonald, 2016). Following the review of early studies into

the readability of financial information, Jones and Shoemaker (1994), Courtis (1995),

Merkl-Davies and Brennan (2007), Brennan, Guillamon-Saorin, and Pierce (2009), Li

(2010b) and Merkl-Davies, Brennan, and Vourvachis (2011) identified that: studies at

the first stage are mixed20 and sampled a quite limited number of firms.

Li (2008) is a typical study at the second stage. After analysing the data of 55,719

firm-years between 1994 and 2004, Li (2008) identified that changes in readability of

managerial-discussion-and-analysis section (measured by number of words and the

Fog index) relate to financial performance and to earnings persistency. Subsequent to

Li (2008), other researchers explored how readability of financial information can be

related to other variables. For instance, You and Zhang (2009) and Lee (2012) looked

into whether and how readability of annual reports is related to information efficiency

of share prices, Miller (2010) and Franco, Hope, Vyas, and Zhou (2015) analysed how

readability of annual reports is related to trading volumes, and Bonsall and Miller

(2016) and Ertugrul, Lei, Qiu, and Wan (2017) link readability of annual reports with

costs of borrowing.

20 For example, Subramanian, Insley, and Blackwell (1993), Ober, Zhao, Davis, and Alexander

(1999), Rutherford (2003) and Henry (2006) render inconsistent outcomes about relationship between

firm performance and readability of annual reports.


In addition to annual reports, other types of information are explored by prior

studies. For example, Brochet, Naranjo, and Yu (2012) examined the relationship

between the readability of conference calls and trading volumes, and Bradbury, Hsiao,

and Scott (2018) analysed the readability of summary annual reports issued by local

governments in New Zealand. Regarding methodology, behavioural experimentation

was used by Rennekamp (2012) and Lawrence (2013) to investigate how readability

of financial information can shape the decision-making process of investors. It is

reasonable to suggest that the readability of literature exponentially grew after the

research conducted by Li (2008).21 In analysing readability of sustainability disclosure,

this thesis arguably contributes to this body of studies.

2.2.2 Tong of Language

As a linguistic phenomenon, tone of language is defined as “the affect or feeling

of a communication” (Henry, 2006, p. 376). Kearney and Liu (2014, p. 172) consider

textual tone as “the degree of positivity or negativity in texts”. It has been investigated

in three types of disclosure, namely corporate disclosure, media articles and internet

posting (Kearney & Liu, 2014). As most of studies about tone of language investigate

it in financial information, this thesis places importance on how it is operationalized

by prior studies. Henry and Leone (2016) identify that there are two approaches in

current literature, namely word frequency and machine learning. It is noteworthy that

Kearney and Liu (2014) already give a comprehensive review of how tone of language

is measured.

Many studies operationalize tone of language in financial information based on

word-frequency measures/ dictionary-based measures/ bag-of-words measures. Such

measures are based on “a mapping algorithm in which a computer program reads text

and classifies the words, phrases or sentences into groups based on pre-defined

dictionary categories” (Kearney & Liu, 2014, p. 175). Two programs, namely General

Inquirer and Diction, are frequently used in analysis of relevant literature. For

example, Tetlock, Saar-Tsechansky, and Macskassy (2008), Loughran and McDonald

21 For example, a number of readability studies, including You and Zhang (2009), Biddle, Hilary, and

Verdi (2009), Moffitt and Burns (2009), Miller (2010), Lehavy et al. (2011), Brochet et al. (2012),

Lee (2012), Rennekamp (2012), Lawrence (2013), Loughran and McDonald (2014b), Jennings, Seo,

and Tanlu (2014), Bozanic and Thevenot (2015), Lang and Stice-Lawrence (2015), Franco et al.

(2015), Bonsall and Miller (2016), Guay, Samuels, and Taylor (2016) and Bushee, Gow, and Taylor

(2017), are performed.


(2011) and Yukselturk and Tucker (2015) utilised the General Inquirer program, and

Henry (2006), Cho et al. (2010), Craig and Brennan (2012), Davis, Piger, and Sedor

(2012), Davis and Tama-Sweet (2012) and Arena et al. (2015) used the Diction

program. In addition to these two dominant computer programs, other programs are

used. For instance, the Oxford Concordance Program is used by Smith and Taffler

(2000), manual analysis is used by Lang and Lundholm (2000), Li (2006) and

Schleicher and Walker (2010), a customised program was developed by Abrahamson

and Park (1994), and Demers and Vega (2010) jointly apply both Diction and General

Inquirer.

In addition to word-frequency measures or dictionary-based measures or bag-of-

words measures, different machine-learning measures22 are used in current literature.

Antweiler and Frank (2004, 2006), Das and Chen (2007) and Li (2010a) use machine-

learning measures to analyse tone of language in a range of disclosure formats,

including online posting, news articles and forward-looking statements, respectively.

This expanding literature has two concerns when it comes to measuring the tone of

language. First, which measure should be used: does bag-of-words or machine-

learning function better? Henry and Leone (2016, p. 155) conclude that there are

“minimal differences in the power of the tests across these alternative tone measures”.

Secondly, which term weighting, equal/proportional, works better? Henry and Leone

(2016) find that equal or proportional weighting does not distort findings. By analysing

the tone of language in sustainability disclosure, the thesis extends this silo of linguistic

literature from financial information to sustainability disclosure. In the following

section, prior studies about corporate governance and sustainability performance are

reviewed.

2.3 CORPORATE GOVERNANCE AND SUSTAINABILITY

PERFORMANCE

Whether and how to integrate sustainability with corporate governance depends

on how sustainability is related to firm performance – if sustainability undermines firm

performance, there is no need to incorporate sustainability into corporate governance.

In the examined literature, many studies into sustainability performance and firm

22 Machine-learning measures are defined as “statistical techniques to infer the content of documents

and to classify them based on statistical inference” (Kearney & Liu, 2014, p. 175).


performance were undertaken. Thus, this section consults meta-analysis and literature-

review studies to better understand how sustainability performance associates with

firm performance. As found by Pava and Krausz (1996), Margolis and Walsh (2001),

Orlitzky, Schmidt, and Rynes (2003), Allouche and Laroche (2005), De Bakker,

Groenewegen, and Den Hond (2005), Margolis, Elfenbein, and Walsh (2007), Orlitzky

(2008), Van Beurden and Gössling (2008), Stefan and Paul (2008), Molina-Azorín,

Claver-Cortés, López-Gamero, and Tarí (2009), Schreck (2009), Horváthová (2010),

Albertini (2013), Goyal, Rahman, and Kazmi (2013), Endrikat, Guenther, and Hoppe

(2014), Lu, Chau, Wang, and Pan (2014), Friede, Busch, and Bassen (2015), Malik

(2015) and Wang, Dou, and Jia (2015), there is a positive link between sustainability

performance and firm performance.

Moreover, many meta-analysis and literature-review studies, including Orlitzky

and Benjamin (2001), Godfrey (2005), Husted (2005), Godfrey, Merrill, and Hansen

(2009), Minor and Morgan (2011), Oikonomou, Brooks, and Pavelin (2012), Jo and

Na (2012), Albuquerque, Durnev, and Koskinen (2013), Mishra and Modi (2013),

Bouslah, Kryzanowski, and M’Zali (2013), Sun and Cui (2014), Koh, Qian, and Wang

(2014), Harjoto and Laksmana (2016), Al‐Hadi, Chatterjee, Yaftian, Taylor, and

Monzur Hasan (2017) and Lins, Servaes, and Tamayo (2017), find that sustainability

performance is negatively related to firm risks. In summary, prior studies indicate that

it is beneficial to incorporate sustainability into corporate governance, as sustainability

improves firm performance and mitigates firm risks.

In extant literature, venues to integrate sustainability with corporate governance

are discussed. Regarding the role of the board of directors, prior studies do not reach

consensus (Jain & Jamali, 2016). On one side, some studies, including Huang (2010)

who analysed 297 electronics firms in Taiwan, Sánchez, Sotorrío, and Díez (2011)

who sampled 125 firms in Spain, and Walls et al. (2012) who tested 2,002 firm-year

observations in the US, found that a board of directors which better serves the interests

of shareholders, also has positive associations with sustainability performance.

Contrastingly, other studies, including Cespa and Cestone (2007), Surroca and Tribó

(2008) and Chintrakarn, Jiraporn, Kim, and Kim (2016), suggest that sustainability

performance is related to managerial discretion and entrenchment. In other words, a

board of directors that does not diligently serve the interests of shareholders

encourages sustainability performance. Thus, whether a board of directors is an asset


to the integration of sustainability with corporate governance is in debate. This thesis

improves this silo of studies by exploring whether and how a board committee can be

an avenue to better integrate sustainability with the decision-making at senior level

and contribute to better sustainability performance. In Section 2.4, prior studies about

corporate governance and sustainability disclosure are discussed.

2.4 CORPORATE GOVERNANCE AND SUSTAINABILITY DISCLOSURE

Corporate governance focuses on how to moderate the behaviour of boards and

senior executives (Mees & Smith, 2019), and corporate governance can be reduced to

issues of regulation and disclosure. Instructed by Jain and Jamali (2016), this section

tabulates seminal studies about the relationship between corporate governance and

sustainability disclosure. It is reasonable to suggest that this thesis just covers a fraction

of the relevant literature.


Table 2-2 Overview of Seminal Studies about Relationship between Sustainability Disclosure and Corporate Governance Author(s) –Year Country Measurement on Sustainability

Disclosure

Measurements on Corporate

Governance

Result

[1] Prado-Lorenzo and

Garcia-Sanchez (2010)

28 countries Scores assigned by the Carbon

Disclosure Project about disclosure of

greenhouse gas emissions

Board independence, CEO duality

and gender diversity of board

Negative or no relationship between

corporate governance and disclosure

are found

[2] Frias‐Aceituno,

Rodriguez‐Ariza, and

Garcia‐Sanchez (2013)

15 countries Different types of disclosure:

financial disclosure only, financial

disclosure and corporate social

responsibility disclosure, and

integrated disclosure

Board size, board independence,

meeting frequency and gender

diversity of board

Board size and gender diversity are

found to be positively related to the

use of corporate social responsibility

disclosure and integrated disclosure

[3] Khan, Muttakin, and

Siddiqui (2013)

Bangladesh Disclosure index Board independence, CEO duality,

presence of audit committee

Board independence and the presence

of an audit committee are found to be

positively related to disclosure

[4] Ntim and Soobaroyen

(2013) South Africa Length of black economic

empowerment disclosure (measured

in number of words)


CEO duality and board diversity

Board size, board independence and

board diversity are positively related

to disclosure

[5] Amran, Lee, and Devi

(2014)

12 countries Disclosure index Board size, board independence, gender diversity of board and

presence of corporate social

responsibility committee

Only the presence of a corporate social responsibility committee is

found to be positively related to

disclosure



Disclosure

Measurements on Corporate

Governance

Result

[6] Fernandez‐Feijoo,

Romero, and Ruiz‐Blanco

(2014)

22 countries Scores assigned by the KPMG

International Survey of Corporate

Social Responsibility Reporting

(2008)

Gender diversity of board (at least

three women on board)

Gender diversity of the board is found

to be positively related to length of

disclosure

[7] Jizi, Salama, Dixon, and

Stratling (2014)

US Disclosure index Board size, board independence,

meeting frequency and CEO

duality


meeting frequency and CEO duality

are found to be positively related to

disclosure

[8] Jizi (2017) UK Disclosure index Board size, board independence,

gender diversity of board and CEO

duality

Board independence and gender

diversity of board are found to be

positively related to disclosure


In order to depict a relatively comprehensive picture about relationship between

corporate governance and sustainability disclosure, this thesis includes four studies at

international level (i.e. [1], [2], [5] and [6]). It is noteworthy that international studies

do not reach a consensus about this relationship. For example, Amran, Lee, and Devi

(2014) report gender diversity does not exert influence on sustainability disclosure, yet

Fernandez‐Feijoo, Romero, and Ruiz‐Blanco (2014) find the effect of gender diversity.

As Table 2-2 shows, four studies at national level (i.e. [3], [4], [7] and [8]) suggest that

there is a positive relation between corporate governance and sustainability disclosure.

Taken together, inclusion of corporate governance characteristics in a research design

can make the design more robust, and future studies with regard to this relationship

are encouraged. As many studies are not included in this chapter, literature-review or

meta-analysis studies are consulted to check how this relationship is reflected in the

literature. Informed by Dienes, Sassen, and Fischer (2016), Jain and Jamali (2016) and

Rao and Tilt (2016) who comprehensively considered relevant studies, this chapter

concludes that there is no true consensus in terms of how corporate governance (e.g.

ownership structure and board of directors) relates to sustainability disclosure. Future

research is expected to therefore explore many opportunities in this field. In Section

2.5, Australian studies (2014 – 2018) published on nine regional accounting journals

are retrieved and reviewed.

2.5 CORPORATE SUSTAINABILITY: AUSTRALIAN EVIDENCE SINCE

2014

As my research setting is Australia, this final section of Chapter 2 (Section 2.5)

provides a survey of the relevant corporate sustainability/ social responsibility studies

that examine how Australian firms react to various incentives and pressures to conduct

sustainability practice. Inspired by Benson, Clarkson, Smith, and Tutticci (2015) who

reveal corporate sustainability/ social responsibility is one of seven major fields where

accounting research has impacted practices, Section 2.5 updates this silo of literature

by reviewing relevant studies since 2014 in the same nine nominated journals:23

Accounting, Auditing and Accountability Journal (AAAJ);

23 I recognise that relevant Australian studies may be published in other journals, such as Business

Strategy and Environment, Journal of Cleaner Production, Journal of Business Ethics and Accounting

and Business Research. But I have retained the same scope of accounting journals as recognised by

Benson, et al. (2015) as the journals’ influence in the accounting discipline in Australia.


Australian Accounting Review (AAR);

Abacus (Abacus);

Accounting and Finance (AF);

Australian Journal of Management (AJM);

Accounting Research Journal (ARJ);

Journal of Contemporary Accounting and Economics (JCAE);

Managerial Auditing Journal (MAJ);

and Pacific Accounting Review (PAR).

Note, here and throughout this study, these journals are presented alphabetically

according to their widely used abbreviations, and no hierarchy is intended or implied

by this ordering.

I inputted keywords, including Australia*, sustain*, social*, envir* and different

combinations of various keywords, into EBSCOhost, Scopus and ProQuest databases

to retrieve the studies that meet all following criteria:

(1) They are published on the aforementioned nine accounting journals;

(2) They are published between 2014 and 2018;

(3) They examine corporate sustainability/social responsibility at firm level;

(4) They are not literature review studies or editorials.

After manually screening the searching outcomes, there are 54 studies that meet

all four criteria. Basic information about these 54 studies is presented below. As Table

2-3 shows, AAAJ, AAR and AF are the top three journals that publish accounting

studies with regard to corporate sustainability/social responsibility using or including

Australian data between 2014 and 2018; and the number of publications gradually

increased over this period of time.


Table 2-3 Basic Information about 54 Studies from 2014 to 2018 in Nine Designated

Accounting Journals Panel A – Journal of Publications

Journal of Publications Number of Publications

AAAJ 14 AAR 11

ABACUS 1

AF 8

AJM 5

ARJ 5

JCAE 2

MAJ 3

PAR 5

Panel B – Year of Publications

Year of Publications Number of Publications

2014 7

2015 8

2016 8

2017 16 2018 15

As Table 2-4 presents, firms’ sustainability disclosure is the most examined topic

(23 studies), followed by sustainability performance (14 studies). In addition to these

two topics, economic consequence and corporate governance with regard to corporate

sustainability also attract much attention. The research themes of these 54 studies are

shown in Panel A of Table 2-5, and research methods used are presented in Panel B of

Table 2-5. As Panel A of Table 2-5 shows, the most researched theme is corporate

sustainability/ social responsibility (31.48%) and climate change/carbon (as a sub-

category of corporate sustainability) also attracts much attention (24.07%). As Panel

B of Table 2-5 presents, regression is the most frequently used method, and qualitative

methods also are frequently used.


Table 2-4 Summary of 54 Studies from 2014 to 2018 on Nine Designated Accounting Journals Code Journal Name (Year) Research Aim(s) / Question(s) Key Findings

[1] PAR Canny (2014) The annual report disclosure of contributions by

Australian firms to the relief appeal in context of the

South-East Asian tsunami of 26 December 2004

• There is a strong relationship between public awareness of

the contributions and disclosing behaviour;

• Firm size and profit are related to some aspects of

disclosure;

• There is no relationship between size of the cash donation

and disclosing behaviour.

[2] AAAJ Egan (2014) How were a heterogeneous range of water efficiency

responses driven across a field of seven water consuming

organisations in Australia at a time of acute drought

conditions into the late 2000s?

• A loosely coordinated range of drivers motivated

pervasive water efficiency responses in few case

organisations;

• Would-be leader organizations sought to invoke a water efficiency field;

• While the field lacked effective champions for change, an

institutionalisation of novel water efficiency practices

continued across the field into 2010.

[3] PAR Hazelton (2014) The labelling of the water footprint of products in an

Australian context • Water footprint reporting could make a significant

contribution to public water literacy;

• Labelling of complex products is currently infeasible, but

existing and emerging solutions may make it possible in

the future.

[4] ABACUS Herbohn, Walker, and

Loo (2014)

The relationship between sustainability performance and

sustainability disclosure within the Australian extractive

industries

• There is a positive relationship between sustainability

performance and sustainability disclosure in the

Australian extractive industries.

[5] PAR Luo and Tang (2014a) The impact of the proposed carbon tax on the financial

market return of Australian firms, and the differential tax

effect on individual firms with different carbon profiles

• The proposed tax has negative impact on shareholder

wealth in Australia;

• The most significant effect is found in the materials,

industrial and financial sectors;


• A firm’s direct carbon exposure is found to be

significantly related to abnormal returns, yet its indirect

exposure is not;

• The influence of proposed carbon tax is more notable

during the early stages of the development of the carbon

tax.

[6] JCAE Luo and Tang (2014b) Whether voluntary carbon disclosure reflects international

firms’ true carbon performance? • There is a positive relationship between carbon disclosure

and carbon performance, suggesting that firms’ voluntary

carbon disclosure in the Carbon Disclosure Project is

indicative of their underlying actual carbon performance.

[7] AAR Tang and Luo (2014) The implementation of carbon management systems by

large Australian firms • For firms that have higher quality carbon management

systems, they achieved better carbon mitigation;

• The most effective elements of carbon management

systems include adequate assessment of carbon risk and

opportunity, the presence of reduction targets, the strength

of carbon programs and enhanced external disclosures.

[8] AAR Fernandez‐Feijoo,

Romero, and Ruiz

(2015)

Factors that explain the decision of intranational firms to

assure their sustainability disclosure and of the choice of a

Big 4 auditor as assuror

• A European Union country affects the decision of a firm

to have sustainability disclosure externally assured and

hire a Big 4 as assurance provider;

• Industry affiliation, firm size, listed status and Global

Reporting Initiative application level are related to use of

external assurance;

• Industry affiliation, firm size, listed status, use of integrate

reporting and Global Reporting Initiative application level

are related to employment of a Big 4 as assurance

provider.

[9] AF Linnenluecke, Birt,

Lyon, and Sidhu

(2015)

Implications of changes in planetary boundary conditions

for increasing the risks of impairment that are contingent

on the impacts of breaches or violations of planetary boundaries with a consequent loss of a social or regulatory

licence to operate

• The Australian top 10 metals and mining firms by market

capitalisation in the 2013/2014 year would encounter

averaged $1.144 billion of impairment loss.


[10] AF Loh, Deegan, and

Inglis (2015)

The corporate social and environmental disclosure

practices of a sample of gambling firms operating within

Australia in time of three specific interrelated Australian

government initiatives

• Corporate social and environmental disclosure is a

response to social pressures created around the time of

these initiatives.

[11] AAR Martínez-Ferrero,

Gallego-Álvarez, and

García-Sánchez (2015)

The connection and possible bidirectional relationship

between corporate social responsibility and earnings

management

• The existence of an inverse bidirectional relationship

between corporate social responsibility and earnings

management;

• This bidirectional relationship is more important in

countries where there is significant institutional pressure with regard to corporate social responsibility and in

countries with greater investor protection.

[12] AAAJ O'Neill, McDonald,

and Deegan (2015)

Whether the different procedures for organising subsets of

a set of accounting data may lead to different conclusions

about (the same) reality?

• The authors demonstrate that different representations of

reality may result not only from accounting choices as to

“what” is measured, but also from accounting choices as

to “how subsets of measured data are organised”.

[13] MAJ Soh and Martinov-

Bennie (2015)

The nature and extent of internal audit functions’

involvement in environmental, social and governance

assurance and consulting in Australia

• Internal audit functions are very involved in providing

assurance on governance issues and reasonably involved

in social issues, but internal audit functions perform a very limited role in providing assurance on environmental

issues;

• Internal audit functions are limited involved in consulting

activities with regard to assurance;

• Environmental issues are widely expected to increase in

importance to internal audit functions;

• Internal audit functions’ skills and competencies with

regard to environmental issues are in greatest need of

further development;

• There is a divergence in usage of standards by internal

audit functions in performing relevant engagement.


[14] AAR Vafaei, Ahmed, and

Mather (2015)

The relationship between gender diversity at board level

and firms’ financial performance

• Board diversity is positively associated with financial

performance.

[15] AAAJ Vesty, Telgenkamp,

and Roscoe (2015)

How is a carbon number (a dollar value derived from

physical units) elevated to become a pivotal actor in

organizational practice?

• The authors highlighted the importance of carbon number

in the newly emergent and evolving carbon market.

[16] MAJ Bepari and Mollik

(2016)

The degree to which assurance statements in sustainability

disclosure enhance and uphold organisational transparency

and accountability to stakeholders

• The assurance statements in sample lack stakeholders’

engagement assurance process, are limited in the scope,

and exhibit reluctance of the assuror to address to the

stakeholder groups;

• As the assurance statements in sample focus on internal

systems, process, data generation and data capture,

assurance practice is serving more as an internal control

tool than as a social accounting/auditing instrument.

[17] ARJ Kumarasiri and Jubb

(2016)

Use of management accounting techniques by Australian

large listed firms in constraining their carbon emissions

• Relevant regulations drive top management and boards to

use management accounting techniques to set targets,

measure performance and incentivise emission mitigation.

[18] AAAJ McPhail and Adams

(2016)

How respect for human rights is emerging and being

operationalized in the discourse of 30 Fortune 500 firms in the mining, pharmaceutical and chemical industries at two

key points in the recent evolution of the United Nations’

business and human rights agenda?

• Corporate constructions of human rights are broad: from

labour rights, through social and political rights, to the right to health and a clean environment;

• The corporate discourse is one of promoting, realizing and

upholding rights that construct the corporation as an

autonomous source of power beyond the state.

[19] AAAJ Moore and McPhail

(2016)

How and to what extent was the development of carbon

accounting frameworks at the policy, industry and

organizational levels enabled by external structures as

conditions of action?

• Soft power and trust are two drivers of the development of

carbon accounting frameworks.

[20] ARJ Ong, Trireksani, and Djajadikerta (2016)

The quality of sustainability disclosures in the current leading environmentally sensitive industry in Australia,

the resources industry

• Australian resources firms report more soft disclosure items than hard disclosure items;


• Australian resources firms report the most sustainability

information in the economic aspect.

[21] ARJ Sands, Rae, and

Gadenne (2016)

The feasibility of integrating the social, environmental and

innovation processes within the four-perspective

sustainability balanced scorecard model

• It is feasible to integrate environmental, social and

innovation-orientated value-creating process into the

internal process of the four-perspective sustainability

balanced scorecard model.

[22] AAAJ Tello, Hazelton, and

Cummings (2016)

The perceptions of potential users about water accounting

reports prepared under Australian general-purpose water

accounting.

• Users perceive the introduction of Australian general-

purpose water accounting as useful and believe that the

benefits will outweigh the costs;

• Government agencies were likely to be the main users of Australian general-purpose water accounting;

• Users were also concerned about the degree of judgement

required to determine the identity and boundaries of a

“water report entity”;

• There was little consensus that Australian general-purpose

water accounting collectively discharged the

accountability of water managers.

[23] MAJ Yunus, Elijido-Ten,

and Abhayawansa

(2016)

Determinants of carbon management strategy adoption

among Australia’s top 200 listed firms • For firms that have carbon management systems, they are

more likely to have an environmental management

system, an environmental committee, larger board and greater board independence.

[24] AAAJ Adams (2017) What is the perceived relationship between the

management and governance of environmental, social and

governance risk, strategy development and value creation?

What role does corporate reporting (including the

processes to develop corporate reports) and cognitive

framing play in mitigating these relationships?

• There is an increased awareness of the impact of

environmental, social and governance issues together with

a broader view of value creation despite investor

disinterest;

• Contemporary reporting processes, and in particular those

set out in the King III Code and the International

Integrated Reporting Framework, affect cognitive frames

that enhance board oversight and assist organizations in

managing complexity.


[25] AAAJ Adler, Mansi, Pandey,

and Stringer (2017)

Biodiversity reporting practices and trends of the top 50

Australian mining firms before and after the United

Nations (UN) declared the period 2011 – 2020 as the

“Decade on Biodiversity”

• A significant increase in the amount of biodiversity

disclosure is observed between 2010 preceding the UN’s

declaration and 2012 and 2013 following the declaration;

• The extent of biodiversity disclosure is quite variable,

with some firms showing substantial increases in their

biodiversity disclosure and others showing modest or no

increase;

• The larger firms in the sample showed a statistically

significant increase in their biodiversity disclosures in

2013 compared with 2010, while the increase in

biodiversity disclosures by smaller firms was not significant;

• The biodiversity information disclosed would not enable

external parties to assess corporate biodiversity

performance.

[26] AF Al‐Hadi, Chatterjee,

Yaftian, Taylor, and

Monzur Hasan (2017)

The relationship between corporate social responsibility

performance and financial distress, and the moderating

impact of firm life cycle stages on this relationship

• There is a negative relationship between corporate social

responsibility performance and financial distress;

• This negative relationship is more pronounced for firms in

mature life cycle stages.

[27] AAR Appuhami and Tashakor (2017)

The influence of audit committee characteristics on voluntary corporate social responsibility disclosure in the

corporate annual reports of Australian listed firms

• Committee size, frequency of committee meetings, committee independence and gender diversity are

positively related to the level of corporate social

responsibility disclosure;

• Independent committee chairperson and members’

financial expertise are not related to the level of corporate

social responsibility disclosure.

[28] AAAJ Blanc, Islam, Patten,

and Branco (2017)

Whether do differences in media exposure regarding

corporate corruption affect firms’ anti-corruption

disclosure?

• Media exposure is positively related to firms’ anti-

corruption disclosure;

• Disclosure is more (less) extensive where home country

press freedom is less (more) restricted;


Whether does the level of press freedom in firms’ home

countries affect relationship between disclosure and the

impact of media exposure?

• Press freedom levels explain more difference in anti-

corruption disclosure than other country-level factors that

potentially affect firms’ anti-corruption disclosure.

[29] AJM Bremer and

Linnenluecke (2017)

A model with regard to organizational adaptation to

climate change • Both environmental attitudes and climate change

knowledge have a significantly positive effect on the

perceived importance of climate change adaptation;

• The aforementioned two relationships are mediated by

risk perception.

[30] AF Hollindale, Kent, Routledge, and

Chapple (2017)

Whether are women on boards associated with disclosure and quality of corporate greenhouse gas emissions related

reporting?

• For firms that have multiple female directors, their greenhouse gas emissions related disclosures are in higher

quality.

[31] PAR Hossain (2017) Biodiversity reporting of the Murray-Darling Basin

Authority, an Australian public sector enterprise, and the

possibility of incorporating biodiversity accounting in

mainstream financial reporting systems of the Authority

• Biodiversity disclosures of the Authority allow a partial

construction of an inventory of natural assets;

• The adequacy of biodiversity data from other sources

make it easier to construct the inventory of natural assets.

[32] AF Hutchinson, Mack, and

Verhoeven (2017)

The gender pay gap in ASX-listed firms

• In terms of performance-based remuneration, females

receive on average 16.47 percent less in cash bonus and

18.21 percent less in long-term incentives than males. [33] AAR Islam, Haque, and

Roberts (2017)

Whether do Australian mineral firms operating in high

human rights risk countries provide more human rights

disclosures than firms operating in low risk countries?

• Human rights disclosures by firms operating high human

rights risk countries are significantly higher than firms

operating in low risk countries.

[34] AF Kent and Zunker

(2017)

What drives Australian firms to voluntarily report

employee-related information? • Employee share ownership, employee concentration, the

quality of corporate governance, employee recognition in

corporate mission statements, adverse publicity about

employees and economic performance measured by profit

per employee

[35] AAR Lodhia and Stone (2017)

The potential role of Internet communication technologies, including social media, in the integrated reporting process

• Use of Internet technologies can enhance external communications with integrated reporting stakeholders.


[36] AF Luo (2017) The relationship between the level of voluntary carbon

disclosure and carbon emission performance, and effect of

institutional context on this relationship

• There is a negative relationship between voluntary carbon

disclosure and carbon emission performance;

• Stringent carbon institutions positively affect this

relationship.

[37] AAR Martínez-Ferrero,

Villarón-Peramato,

and García-Sánchez

(2017)

Investors’ ability to identify if managers use corporate

social responsibility as an entrenchment practice to

conceal the risk of dismissal associated with managerial

discretion and, if this detection is determined by the level

of investor protection orientation

• Investors and markets do not identify managerial

entrenchment in the promotion of sustainable practices,

except when such entrenchment is developed by firms

domiciled in countries with strong investor protection.

[38] AAAJ Powell and Tilt (2017) The inside details of a firm that attempted to keep a balance between financial sustainability and

environmental sustainability

• This firm did not effectively transfer the power held by managers who align with environmental sustainability to

managers who align with financial sustainability, possibly

leading to its ultimate demise;

• A new business model is needed to ensure an effective

transition.

[39] AAAJ Sundin and Brown

(2017)

The integration of environmental issues into management

control systems • The integration of environmental issues affects firms’

focus;

• When the interests of agents are aligned to environmental

outcomes, environmental outcomes at least receive

somewhat systematic consideration in decision making.

[40] AF Abhayawansa, Elijido‐

Ten, and Dumay

(2018)

Whether does integrated reporting achieve its intended

purpose by focusing on its usefulness as perceived by sell-

side analysts?

• Integrated reporting is disconnected with analysts’

practice of firm assessment;

• The improvements with regard to integrated reporting are

not relevant to analysts.

[41] ARJ Ahmed, Higgs, Ng,

and Delaney (2018)

Determinants of women representation on Australian

corporate boards under the ASX’s “if not, why not”

corporate governance framework

• Firm size, women as board chair, corporate governance

index, Global Reporting Initiative signatory, debt ratio,

average board age, use of Big 4 auditors, CEO tenure and

shareholder concentration

[42] AJM Beck, Frost, and Jones

(2018)

The relationship between corporate social responsibility

engagement (measured by diversity in voluntary disclosure practices) and financial performance across three reporting

• There is a positive relationship between corporate social

responsibility engagement and financial performance.


jurisdictions, namely Australia, Hong Kong and the United

Kingdom

[43] AAR Blanc, Branco, and

Patten (2018)

The relationship between countries’ cultural characteristics

and firms’ anti-corruption disclosures

• For firms are domiciled in more ‘secretive’ countries, they

have significantly lower levels of anti-corruption

disclosure.

[44] PAR Biswas, Mansi, and

Pandey (2018)

The relationship between board gender composition, board

independence and the existence of a board sustainability

committee and social and environmental performance

• A positive relationship between the aforementioned three

corporate governance characteristics and social and

environmental performance.

[45] AAR Dumay and Hossain

(2018)

The extent to which the top 100 ASX listed firms

disclosed economic, environmental and social sustainability risk factors during the 2014/15 financial year

• While all firms complied with the Recommendation 7.4,

questions of substance over form were raised, as some firms had risks that were not disclosed according to this

Recommendation.

[46] AAAJ Egan and Tweedie

(2018)

How can accountants contribute to organisational

sustainability initiatives? • Initially, management successfully engaged accountants;

• As related initiatives expanded, adaptable accountants

were difficult to find;

• The capacity of accountants to engage in sustainability

initiatives was also affected by management’s perception

of accountants’ role, the economic and symbolic capitals

management provided and the “stakes” of the

organisational field.

[47] ARJ Elsayih, Tang, and Lan

(2018)

The relationship between corporate governance

mechanisms and the extensiveness of carbon disclosure • Board independence, number of females on the board and

managerial ownership are positively related to the

extensiveness of carbon emissions disclosure.

[48] AAR García‐Sánchez and

Noguera‐Gámez

(2018)

Determinants of use of integrated reporting • Firm incentives are more influential than country factors;

• For firms that encounter higher levels of asymmetry

information problems, firm incentives dominate country

factors;

• For firms that encounter lower levels of asymmetry

information problems, country factors are more

influential.


[49] AAAJ Heggen, Sridharan,

and Subramaniam

(2018)

Why do firms governed by the same environmental

management standards within an industry exhibit

contrasting responses, with some adhering to the letter and

others achieving the spirit behind the standards?

• The extent to which founder directors and senior

management integrate environmental responsibility with

the underlying business motives;

• The use of organisational beliefs and values systems to

institutionalise the integrated strategic rationality

throughout the firm;

• The participation and expertise of actors across the

organisational hierarchy.

[50] JCAE Krishnamurti, Shams,

and Velayutham

(2018)

Whether and to what extent does corporate social

responsibility affect international firms’ corruption risk? • Corporate social responsibility mitigates corruption risk;

• The relationship between corporate social responsibility and corruption risk is affected by country-level variables,

including institutional quality, protection of minority

shareholders’ rights, stock market development and

freedom of the press;

• In emerging countries, corporate social responsibility

reduces corruption risk only when the country-level

institutional quality is high, and citizens enjoy press

freedom.

[51] AJM Nguyen (2018) The effect of carbon risk on firm performance in context

of the Australia ratification of Kyoto Protocol in

December 2007

• Firms in highest-emitting industries experienced a relative

reduction in their financial performance subsequent to the

ratification;

• The effect of carbon risk is more pronounced among

financially constrained firms.

[52] AJM Nguyen, Agbola, and

Choi (2018)

Relationship between corporate social responsibility and

information asymmetry • There is a negative relationship between corporate social

responsibility performance and information asymmetry;

• Firm size, firms’ market power and equity risk affect this

relationship.

[53] AAAJ Phan, Baird, and Su

(2018)

The extent of use of environmental activity management,

the relationship between environmental activity

management and environmental performance, and the role

of decision quality as a mediator in this relationship

• A relatively high extent of environmental activity

management, but a low extent of use of environmental

activity cost analysis and environmental activity-based

costing;


• For firms that use environmental activity management to a

greater extent, they generate better environmental

performance;

• Decision quality affects the relationship between

environmental activity management and environmental

performance.

[54] AJM Salignac, Galea, and

Powell (2018)

The drivers and processes of change with regard to gender

equality in the workplace. • Although gender equality is an important topic for both

firms in this study, there are discrepancies between

perceptions and reality, and people’s level of readiness is

also different.

Table 2-5 Research Themes and Methods of 54 Studies from 2014 to 2018 in Nine Designated Accounting Journals Number of

Studies

Studies (in Code)

Panel A – Research Themes

Biodiversity 2 [25], [31]

Carbon/ Climate Change 13 [5], [6], [7], [9], [15], [17], [19], [23], [29], [30], [36], [47], [51] Charity 1 [1]

Employees 1 [34]

Environmental 4 [38], [39], [49], [53]

Firm Corruption 3 [28], [43], [50]

Gender 5 [14], [30], [32], [41], [54]

Health and Safety 1 [12]

Human Rights 2 [18], [33]

Integrated Reporting 3 [35], [40], [48]

Sustainability/ Social Responsibility (in

General)

17 [4], [8], [10], [11], [13], [16], [20], [21], [24], [26], [27], [37], [42], [44], [45], [46], [52]

Water 3 [2], [3], [22]

Panel B – Research Methods

Case/ Field Study/ Interviews 14 [2], [3], [13], [15], [17], [22], [24], [25], [38], [39], [40], [46], [49], [54]

Content Analysis/ Historical Analysis 13 [10], [16], [18], [19], [20], [25], [30], [31], [33], [38], [39], [45], [49]


Structural Equation Modelling/ Regression/

Event Study

29 [1], [4], [5], [6], [7], [8], [9], [11], [14], [21], [23], [26], [27], [28], [29], [30], [32], [34], [36], [37], [41],

[42], [43], [44], [47], [48], [50], [52], [53]

Commentary/ Normative/ Policy 2 [12], [35]


2.5.1 Studies about Sustainability Disclosure

There are 23 studies ([1], [3], [4], [6], [10], [12], [18], [20], [24], [25], [27], [28],

[30], [31], [33], [34], [35], [36], [40], [43], [45], [47], [48]) that explore sustainability

disclosure. First, McPhail and Adams (2016) (human-rights disclosure), Adler, et al.

(2017) (biodiversity disclosure), Hossain (2017) (biodiversity disclosure) and Dumay

and Hossain (2018) (sustainability risk disclosure) shed light on how Australian firms

disclosed their sustainability practices. Ong, et al. (2016) analysed how firms affiliated

with resources industry communicated sustainability practices.

Secondly, determinants of (a specific type of) sustainability disclosure are tested

by a number of studies. Canny (2014) (charity disclosure), Appuhami and Tashakor

(2017) (sustainability disclosure), Hollindale, et al. (2017) (carbon disclosure), Kent

and Zunker (2017) (employee-related disclosure) and Elsayih, et al. (2018) (carbon

disclosure) examined determinants at firm level. Blanc, et al. (2017) (anti-corruption

disclosure), Islam, et al. (2017) (human-rights disclosure), Blanc, et al. (2018) (anti-

corruption disclosure) and García‐Sánchez and Noguera‐Gámez (2018) (integrated

reporting) examined determinants at national level. Loh, et al. (2015) focused on how

industrial environment affects sustainability disclosure.

Thirdly, non-economic consequences of sustainability disclosure are considered

by O'Neill, et al. (2015) and Adams (2017). O'Neill, et al. (2015) examined how work-

related injury data can be interpreted to depict quite different pictures about reality. By

interviewing business leaders in South Africa and Australia, Adams (2017) found that

sustainability disclosure contributes to an integration of sustainability with corporate

governance.

Fourthly, usefulness of integrated reporting (a type of sustainability disclosure)

to financial analysts has been explored by Abhayawansa, et al. (2018). Hazelton (2014)

investigated usefulness of another new type of sustainability disclosure, namely water

footprint labelling.

Fifthly, relationship between (a specific type of) sustainability disclosure and (a

specific area of) sustainability performance has been tested by Herbohn, et al. (2014)

(environmental disclosure of mining and energy firms), Luo and Tang (2014b) (carbon

disclosure of firms in three countries) and Luo (2017) (carbon disclosure of firms in

multiple countries). It is noteworthy that while Luo and Tang (2014b) and Luo (2017)

focus on relationship between carbon disclosure and carbon performance, they reach


opposite conclusions. Last, Lodhia and Stone (2017) normatively highlighted potential

contribution of Internet to integrated reporting.

2.5.2 Studies about Sustainability Performance

There are 13 studies ([2], [7], [17], [29], [32], [38], [39], [41], [44], [46], [49],

[53] and [54]) that focus on sustainability performance. First, Hutchinson, et al. (2017),

examining 41, 655 executive-year observations from 2002 to 2013, found existence of

gender inequity in directors’ remuneration in Australia. Secondly, a number of studies

focus on how corporate governance (dis)encourages (a specific area of) sustainability

performance. Tang and Luo (2014) examined effect of carbon management system on

firms’ carbon performance. Powell and Tilt (2017) highlighted need for new business

model to solve tensions due to power transfer among managers in terms of keeping a

balance between economic sustainability and environmental sustainability. Biswas, et

al. (2018) examined effect of three corporate governance characteristics, namely board

gender diversity, board independence and existence of sustainability committees, on

firms’ sustainability performance. Sundin and Brown (2017) and Phan, et al. (2018)

discussed importance of internal management systems to environmental performance.

Heggen, et al. (2018) revealed organizational culture and integration of sustainability

with corporate governance would impact firms’ environmental performance. Thirdly,

Ahmed, et al. (2018) investigated a number of firm characteristics that are expected to

relate to gender diversity on board. Fourthly, how individuals within firms would (dis)

encourage (a specific area of) sustainability performance has been examined by three

studies. By surveying 101 energy firms in Australia, Bremer and Linnenluecke (2017)

reported that managers’ environmental attitudes, climate change knowledge and risk

perception affect how they perceive importance of climate change adaptation. Egan

and Tweedie (2018) examined how accountants were engaged in firms’ sustainability

initiatives. Salignac, et al. (2018) focused on how institutional entrepreneurs promote

gender diversity within construction industry in Australia. Last, Egan (2014) explored

how institutions at field level motivate firms’ water efficiency, and Kumarasiri and

Jubb (2016) examined how regulation inspires firms to use management accounting to

improve their carbon performance.


2.5.3 Studies about Economic Consequence of Corporate Sustainability

There are 10 of 54 studies ([5], [9], [11], [14], [26], [37], [42], [50], [51] and

[52]) that examine economic consequence of corporate sustainability. First, how

carbon-related public policy and climate change affect firm value has been studied by

Luo and Tang (2014a) (proposed carbon tax in 2011), Nguyen (2018) (ratification of

Kyoto Protocol in 2007) and Linnenluecke, et al. (2015) (impairment loss caused by

climate change). Secondly, Martínez-Ferrero, et al. (2015) tested relation between

firms’ sustainability performance and earnings management at international level, and

Martínez-Ferrero, et al. (2017) analysed whether investors can detect linkage between

sustainability performance and managerial entrenchment. Nguyen et al. (2018) shed

light on relation between sustainability performance and information asymmetry.

Thirdly, relationship between (a specific area of) sustainability performance and

financial performance has been examined by Vafaei, et al. (2015) (how gender

diversity of board of directors is related to financial performance) and Krishnamurti,

et al. (2018) (how firms’ sustainability performance is related to corruption risk).

Fourthly, relationship between sustainability disclosure and financial performance has

been analysed by Al‐Hadi, et al. (2017) and Beck, et al. (2018).

2.5.4 Studies about Assurance Services

Three studies ([8], [13] and [16]) examine assurance services. First, Fernandez‐

Feijoo, et al. (2015) investigated determinants at national and firm levels with regard

to use of assurance services. Secondly, Soh and Martinov-Bennie (2015) explored how

internal auditors participate in assurance services. Thirdly, Bepari and Mollik (2016)

discussed accountability consequence of external assurance services by analysing the

assurance statements.

2.5.5 Studies about Corporate Governance with regard to Corporate

Sustainability

There are two studies ([21] and [23]) that focus on corporate governance devices

or structures with regard to corporate sustainability. First, Sands, et al. (2016) explored

how we can better use sustainability scorecard. Secondly, Yunus, et al. (2016) analysed

determinants at firm level in use of carbon management systems.


2.5.6 Other Studies about Corporate Sustainability

In addition to the aforementioned five research topics (disclosure, performance,

economic consequence, assurance services and corporate governance), other topics are

also considered. Focusing on relevant public policy, Moore and McPhail (2016) shed

light on development of carbon accounting frameworks, and Tello, et al. (2016) elicit

users’ views about general-purpose waster accounting. In context of a large Australian

water utility, Vesty, Telgenkamp, and Roscoe (2015) discussed effect of quantifying

carbon emissions.

2.5.7 How this Thesis is Positioned in the Australian Literature

My first question (RQ1: Whether and how is an Australian firm’s sustainability

performance associated with its sustainability disclosure?) aligns with Herbohn, et al.

(2014), Luo and Tang (2014b) and Luo (2017) that focus on the relationship between

disclosure and performance. Chapter 3 (in which I examine RQ1) differentiates from

these studies by focusing on various textual characteristics of sustainability disclosure

together and using more recent and comprehensive data. Thus, Chapter 3 can provide

much richer and more generalizable conclusions about this frequently examined topic,

namely how disclosure relates to performance.

The second research question (RQ2: How is experience of disclosure related to

sustainability performance?) develops results of Adams (2017) by empirically testing

how firms’ experience of disclosure is related to their sustainability performance. My

approach differentiates from Adams (2017) who interviewed directors in Australia and

South Africa by analysing a set of panel data collected and synthesized. Collectively,

my work in addressing RQ2 and Adams (2017) explores the relationship between

disclosure and performance from a novel view: instead of examining how

sustainability disclosure is related to or affected by sustainability performance, I

explore or consider the other way around, namely how engagement in sustainability

disclosure affects or relates to sustainability performance.

The third research question (RQ3: How is the sustainability committee related

to sustainability performance?) relates to Tang and Luo (2014), Powell and Tilt (2017),

Biswas, et al. (2018), Sundin and Brown (2017), Phan, et al. (2018), and Heggen, et

al. (2018) by examining the effect of sustainability committees on firms’ sustainability

performance in detail. My work of addressing RQ3 differentiates from the


aforementioned studies in two ways. First, I investigate sustainability committee as a

governance mechanism devoted to corporate sustainability, which is not

systematically studied yet has implications for practice. Second, I use a more robust

research design that is built on a longer sample period, richer committee

characteristics, inclusion of firms in different industries, and the use of different

performance measurements to render comprehensive evidence in this regard.

Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance 61

Chapter 3: Textual Characteristics of

Sustainability Disclosure and their

Relationship to Sustainability Performance

3.1 INTRODUCTION

As Chapter 1 illustrates, corporate sustainability includes economic prosperity,

social equity and environmental integrity (Bansal, 2005). Prior literature emphasises

environmental and social impact due to firms’ operational activities (Dahlsrud, 2008).

Ostensibly, sustainability disclosure is an important part of transparency in corporate

sustainability, which is a key concern of many stakeholders (Gray, Owen, & Adams,

1996). There is currently a momentum of mandatory sustainability disclosure24 at a

global level. For instance, sustainability disclosure has been mandated according to

firm size in Argentina and the European Union.25 Exchanges in the Asia-Pacific region

are taking action on mandatory sustainability disclosure.26 The Australian Securities

Exchange is a partner of the Sustainable Stock Exchanges Initiatives27, an initiative

backed by the United Nation to improve transparency of corporate sustainability, and

it also acknowledges ‘long term sustainable value’ and ‘acting lawfully, ethically and

responsibly’ (ASX, 2019, p. 16). In addition to the Australian Securities Exchange,

legislators and regulators have begun to address firms’ sustainability and disclosure,

as discussed in Chapter 1. For instance, a firms’ contributions to climate change have

been discussed by the Senate Economics References Committee28 and the Australian

Securities and Investments Commission.29

24 According to United Nations Environment Programme and KPMG (2006) and United Nations

Environment Programme et al. (2010, 2013, 2016), there is indeed a trend of mandatory disclosure of

corporate sustainability. 25 See the Ley Nº 2594 de Balance de Responsabilidad Social y Ambiental (BRSA) and Directive

2014/95/EU. 26 The Hong Kong Exchange, Singapore Exchange and Taiwan Stock Exchange also mandate sustainability disclosure to their listed firms, and more information can be found at

http://www.sseinitiative.org/ (access date is 8 May 2019). 27 More information about the Sustainable Stock Exchanges Initiatives and who are partner exchanges

can be found at http://www.sseinitiative.org/ (access date is 8 May 2019). 28 This committee published a report, Carbon Risk: A Burning Issue, in 2017. 29 As the market regulator in Australia, the Australian Securities and Investments Commission

released a report, Climate Risk Disclosure by Australia’s Listed Companies, in 2018.

62 Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance

From a broader perspective, as firms and stakeholders incur costs in preparing,

disseminating and using sustainability disclosure, transparency of firms’ sustainability

performance can be undermined by corporate symbolic action. Bowen (2014) explains

that symbolic action has social cost, as resources invested on symbolic action could

alternatively be devoted to substantial action. Therefore, research on sustainability

disclosure is also meaningful to society in general.

In practice, Australian firms are increasingly engaged in sustainability disclosure

(KPMG, 2015, 2017), and stakeholders actively utilise such disclosure. Pérez-Gladish

et al. (2012) and Eccles et al. (2017) found that institutional investors are increasingly

engaged in socially responsible investment, and they view low quality of sustainability

disclosure as a significant obstacle. KPMG and SustainAbility (2008), surveying non-

financial stakeholders, find that they use sustainability disclosure in a number of

scenarios. It is a reasonable expectation that sustainability disclosure will find more

users in the future, as socially-responsible-investment assets in Australia and New

Zealand rose by 247% from 2014 to 2016 to reach $516 billion (Foo, 2017).

Practitioner surveys and prior literature generally identify the sustainability

themes disclosed, how much information is reported, and where such information is

disclosed. The practitioner surveys on disclosure practices of Australian firms find that

more firms are engaged in sustainability disclosure, and more disclosure is being

released (Australian Council of Superannuation Investors, 2009, 2010, 2011, 2012,

2013, 2014, 2015, 2016, 2017, 2018; KPMG, 2013, 2015, 2017). Using the Global

Reporting Initiative, Frost et al. (2005) and Beck et al. (2018) evaluate sustainability

disclosure and find that Australian firms prefer standalone reports and their websites

as methods of communicating issues relating to sustainability and are able to present

them in a way that matches their performance.

This chapter extends on Cho et al. (2010), Arena et al. (2015), Beattie (2014),

Tregidga, Milne, and Lehman (2012) and Wang et al. (2018) by investigating textual

characteristics of sustainability disclosure (which cover linguistic characteristics) and

is informed by prior literature about textual characteristics in financial disclosure (see

e.g. Henry & Leone, 2016; Huang, Teoh, & Zhang, 2014; Li, 2010b; Loughran &

McDonald, 2016). As documented by prior literature about textual characteristics of

financial information (Ertugrul et al., 2017; Henry & Leone, 2016; Kearney & Liu,


2014), it is argued linguistic characteristics of sustainability disclosure are meaningful,

as they affect how stakeholders understand sustainability disclosure.

As Wood (1991a, 1991b, 2010), Clarkson et al. (2008), Clarkson et al. (2011),

Tregidga et al. (2014), Rao and Tilt (2016), Global Reporting Initiative (2014) and

Guthrie (2016) indicate, whether and how textual characteristics of disclosure relate to

performance are in debate. Prior literature reviewed in Chapter 2 suggests different

theories or theoretical frameworks inform different views in terms of their relationship.

For example, signalling theory proposes good performers use textual characteristics of

disclosure to signal their good performance (Connelly, Certo, Ireland, & Reutzel,

2011), yet institutional theory (decoupling) conjectures that bad performers use their

method of disclosure to cover up their unsatisfactory or bad performance (Delmas &

Burbano, 2011; Laufer, 2003; Ramus & Montiel, 2005). This chapter develops the

following research question:

RQ1: Whether and how is an Australian firm’s sustainability performance

associated with its sustainability disclosure?

Through analysing 2,076 firm-year observations (2002-2016), Chapter 3 models

seven textual characteristics (amount of disclosure, amount of quantitative information

in disclosure, amount of information in relation to environmental impact, tone of

optimism in disclosure, tone of certainty in disclosure, tone of clarity in disclosure,

and readability of disclosure) as variables of interest; where the dependent variable is

sustainability performance. I identified a positive relationship between sustainability

performance and six of the seven textual characteristics – good performers disclose

more information, more quantitative data, more environmental-impact information

and present their disclosure in a certain, clear and optimistic manner. These findings

lend support to the arguments of signalling theory.

In addition, this chapter identifies that firms with better performance present

their sustainability disclosure in a more readable way, the seventh characteristic. This

finding supports the incomplete revelation hypothesis proposed by Bloomfield (2002,

2008) wherein firms with better performance communicate their performance in ways

that stakeholders can easily comprehend. Chapter 3 argues that this finding aligns to

some extent with signalling theory – good performers prepare their disclosure in a way

that signals their superior performance.


These findings are in line with Herbohn et al. (2014), who found that Australian

firms with better environmental performance release higher quality environmental

disclosure. The findings of this chapter are robust to different sensitivity checks that

have been performed in addition to the main analysis. From a theoretical view, Chapter

3 reveals the explanatory power of signalling theory and the incomplete revelation

hypothesis.

Ostensibly, this chapter enriches the current literature through focusing on the

relationship between disclosure and performance by investigating various linguistic

characteristics of sustainability disclosure (Beattie, 2014; Beattie & Davison, 2015)

and extending the research scope from content to include other textual characteristics.

For example, seminal studies in extant literature, Guthrie and Parker (1989) and

Deegan et al. (2002) analyse thematic content of disclosure via the lens of legitimacy.

Responding to Beattie et al. (2004) and Beattie (2014), this thesis extends the scope of

linguistic analysis from financial disclosure to sustainability disclosure, suggesting the

usefulness of linguistic analysis in different areas. Cho et al. (2010), Arena et al. (2015)

and Wang et al. (2018) examined the tone of optimism and readability, respectively,

in disclosure of the US firms. Chapter 3 extends the aforementioned studies in four

ways: (1) as a standalone report has more detailed sustainability information, I sampled

disclosure from two mediums (standalone report and annual report); (2) this chapter

covers both social and environmental disclosure, rather only environmental disclosure;

(3) this chapter samples firms from a wide range of industries over a time period of 15

years, while prior studies usually sample fewer industries and are generally conducted

over shorter time periods; (4) Chapter 3 takes into account seven textual characteristics

rather one characteristic at a time. Chapter 3 presents a more comprehensive picture

about sustainability disclosure.

The research findings are likely to be of interest to external assurance providers

of sustainability disclosure. In addition to content, the textual characteristics examined

in Chapter 3 are worthy of attention when performing assurance services on disclosure.

As sustainability disclosure has been a channel of communicating sustainability issues

(Higgins, Milne, & Gramberg, 2015), the findings advise future regulatory framework

to pay more attention on readability of sustainability disclosure.

The rest of this chapter is structured as follows. Prior literature is discussed in

Section 3.2. Hypotheses are developed in Section 3.3. Research design is illustrated in


Section 3.4. Findings are presented in Section 3.5. This chapter concludes in Section

3.6.

3.2 RELEVANT KEY LITERATURE

There are few Australian studies that link disclosure directly with performance.

Relevant existing studies do not reach a consensus about the relationship between

disclosure and performance. Examining how firms that are penalized for their poor

environmental performance (1990 - 1993) report environmental performance in annual

reports, Deegan and Rankin (1996) find firms disclose more favourable environmental

information after they are penalized for their poor performance, a negative relationship

between disclosure content and underlying performance. Following the sample period

of 1994 – 1998, Mitchell, Percy, and McKinlay (2006) reach similar findings. Testing

how Australian firms report their environmental performance, Clarkson et al. (2011)

sampled 51 firms between 2002 and 2006. Referring to content analysis developed by

Clarkson et al. (2008), their study reveals that firms with a higher pollution propensity

disclose not only more information but also more information that is perceived to be

objective and verifiable. Thus, the above studies indicate that worse performers tend

to put more effort in disclosure.

By contrast, Herbohn et al. (2014), sampled 339 firms from the materials as well

as energy industries and found better performers disclose environmental information

with higher quality. There is a caveat in that their study sample only covers 2006. My

research differentiates from Herbohn et al. (2014) in four ways. First, instead of using

corporate disclosure to estimate sustainability performance, I use panel data provided

by ESG rating agency to measure sustainability performance. Second, instead of using

firms from the energy and materials industries as the sample, I construct my sample

based on firms from various industries. Third, my research focuses on textual

characteristics of sustainability disclosure, rather than disclosure content. Fourth,

instead of analysing cross-sectional data, I examine panel data. Conflicting results

about the relationship between disclosure and performance may be attributed to

various reasons, including different research analysis, sample selection and methods

of coding environmental disclosure. Examining the relation between disclosure of

greenhouse gas emissions (it is measured in the number of items disclosed) and

greenhouse gas emissions in three countries (i.e. the US, the UK and Australia), Luo


and Tang (2014) found that firms that emit less greenhouse gas or adopt better

mitigation techniques disclose more items relevant to greenhouse gas emissions.

In addition to prior studies examining environmental performance, there are

other studies that approach corporate sustainability from a social perspective, for

example taxation. Prior literature, including Sikka (2010), Huseynov and Klamm

(2012) and Hoi, Wu, and Zhang (2013), argues that corporate tax decisions can be

considered as part of a firm’s sustainability, as tax decisions have a discernible social

impact. In this sense, tax avoidance is perceived to have a negative social impact.

Analysing two different samples of Australian firms, Lanis and Richardson (2012a,

2012b) produce opposite findings. Lanis and Richardson (2012a) identify that firms

accused by the Australian Taxation Office of engaging in tax aggressive activities from

2001 to 2006 release more sustainability disclosure (i.e. it is measured in number of

sentences). In the other sample that covers 408 firms in 2008, Lanis and Richardson

(2012b) find that more disclosure (i.e. it is measured in number of items disclosed) is

related to lower level of corporate tax aggressiveness.

Except for content, other textual characteristics of sustainability disclosure are

analysed by very few studies. Cho et al. (2010) studied 190 US firms in 2002 and

found that worse performers communicated in more optimistic and certain terms.

Arena et al. (2015) investigated 96 US firms in the oil and gas sector between 2008

and 2010 and found that the level of optimism in environmental disclosure signals

future environmental performance. These two studies suggest that there are two roles

of tone of optimism in environmental disclosure: covering up poor performance and/or

signaling future performance. Another linguistic characteristic, namely the readability

of sustainability disclosure, has been analysed by Wang et al. (2018) who sampled 331

US firm-year observations from 2009 to 2012. They found a positive relationship

between performance and readability of disclosure. Furthermore, the relationship is

stronger for social disclosure than for environmental disclosure. My research expects

to extend the aforementioned studies in two ways. First, by analysing various textual

characteristics at a time, I can render more compelling and comprehensive evidence in

relation to textual characteristics of sustainability disclosure. The aforementioned US

studies examine one or two textual characteristic(s) at a time, greatly restricting their

ability to present a more complete picture about textual characteristics of sustainability

disclosure. Second, by including environmental and social themes and constructing a


set of panel data based on firms from a diverse range of industries, this research is able

to draw richer and more generalizable conclusions than the three studies referred. It is

notable that the readability of financial information also has been extensively analysed.

Chapter 3 refers to this silo of literature to include control variables in specification

design.

In summary, prior literature can be enriched by Chapter 3 in two ways. First, this

chapter contributes to the Australian literature by casting light on how disclosure

relates to performance. Extending on prior studies, I include different characteristics

of disclosure at a time. Secondly, this chapter contributes to growing literature

regarding linguistic analysis and sustainability disclosure. I use more recent and

comprehensive data: environmental and social themes are included, and the panel data

nature of my sample, combined with an inclusive analysis of textual characteristics

allows one to draw much richer and more generalizable conclusions. The theoretical

framework and hypotheses are introduced in following section.

3.3 THEORETICAL FRAMEWORK AND HYPOTHESIS

DEVELOPMENT

This chapter outlines the first hypothesis presented in this thesis according to

two theories, namely institutional theory (Meyer, 1992; Meyer & Rowan, 1977; Scott

& Meyer, 1992) and signalling theory (Connelly et al., 2011; Morris, 1987). The first

theory, institutional theory, suggests that for firms within a same organizational field,

their strategies can be “substantially influenced by the broader institutional settings in

which they operate and shaped by the institutional legacies that reflect the culture,

history, and polity of the particular country or region” (Doh & Guay, 2006, p. 49). In

relation to what consists of organizational field, DiMaggio and Powell (1983, p. 148)

suggest that “those organizations that, in the aggregate, constitute a recognized area of

institutional life: key suppliers, resource and product consumers, regulatory agencies,

and other organizations that produce similar services or products”. Another two basic

concepts in institutional theory are institutions and formal structures (also known as

organizational structures). Scott (2001, p. 48) explained “institutions are composed of

culture-cognitive, normative and regulative elements that, together with associated

activities and resources, provide stability and meaning to social life”. There are three

types/silos of institutions, cognitive-cultural, social-normative and coercive-regulative

(Scott, 2001).


Institutions shape formal structures that confer legitimacy30 on firms that put the

formal structures in place. Formal structures are defined as “a blueprint for activities

which includes, first of all, the table of organization: a listing of offices, departments,

positions, and programs. These elements are linked by explicit goals and policies that

make up a rational theory of how, and to what end, activities are to be fitted together”

(Meyer & Rowan, 1977, p. 342). Pressures imposed by three types/silos of institutions

contribute to isomorphism, which is defined as “a constraining process that forces one

unit in a population to resemble other units” in a same organizational field (DiMaggio

& Powell, 1983, p. 149). Restated, institutional pressures force firms to use similar or

even identical formal structures.

There are three isomorphism processes. First, coercive isomorphism is related to

external factors, including regulations (DiMaggio & Powell, 1983). Second, mimetic

isomorphism, involves firms trying to emulate or copy other firms’ practices, mainly

to obtain competitive advantage (DiMaggio & Powell, 1983). Third, there is normative

isomorphism. It relates to the pressures emerging from common values to follow, obey

and adopt particular institutional practices. Thus, isomorphism of institutional theory

is used to explain why firms invest in corporate sustainability. For example, Campbell

(2006, 2007) discusses determinants of sustainability performance from institutional

theory aspect, and proposes regulations (imposed by state and industrial associations),

pressure from powerful institutionalized stakeholder groups (e.g., labour union), and

normative calls of corporate sustainability at society level promote better sustainability

performance. Liang and Renneboog (2017) provide empirical evidence supportive to

the theory by demonstrating that legal origins at country level is a major determinant

of sustainability performance.

A possible (negative) consequence of isomorphism is the separation between the

external public image of a firm and its actual structures and procedures or practices. A

firm’s actual practices (sustainability performance) need not necessarily comply with

its external public image (sustainability disclosure). This argument has been discussed

from different interrelating perspectives, including compromise (Oliver, 1988, 1991,

1997), legitimacy (Deegan, 2002), greenwashing (Delmas & Toffel, 2011), decoupling

30 Corporate legitimacy “is meeting and adhering to the expectations of a social system’s norms,

values, rules, and meanings” (Deephouse & Carter, 2005, pp. 331-332).


(Boxenbaum & Jonsson, 2008) and impression management (Brennan et al., 2009). In

relation to RQ1, from an institutional theory view, worse performers use sustainability

disclosure as a shield from socio-political pressures due to worse performance. They

are expected to disclose sustainability information in ways that disguise their poor

performance and mislead stakeholders. To be specific, textual characteristics analysed

in this chapter consider how much sustainability information, quantitative information

and information about environmental impact are disclosed, to what extent disclosure

is communicated in optimistic, certain and clear tones, and to what extent disclosure

is readable.

In terms of the first six textual characteristics, as institutional theory instructs,

worse performers report information in a more comprehensive way (i.e. measured in

number of words), more quantitative information (operationalized by the Diction 7),

and more information about environmental impact (measured in number of words);

they would communicate in more ambiguous, optimistic and certain tone to mislead

stakeholders.

The second theory, signalling theory, highlights that information asymmetry can

be mitigated by “the party with more information signalling it to others” (Morris, 1987,

p. 48). In the first step, firms in a market are assumed to have more information about

their sustainability than stakeholders. If stakeholders have no information about firms’

sustainability but do have some general concerns (e.g. some of business activities can

be not sustainable), stakeholders measure firms’ sustainability at a weight average of

their concerns. In the second step, for firms that are in above average quality condition

with regard to sustainability, they incur an opportunity loss if stakeholders knew about

their superior sustainability performance, although firms of below average in terms of

sustainability make an opportunity gain. For firms of above average in sustainability,

they would use sustainability disclosures to signal their superior sustainability. In the

third step, as firms that are better in sustainability signal, stakeholders consider all the

remaining firms to be of poor. The best remaining firms then try to screen themselves

from the others via sustainability disclosure. As Connelly et al. (2011) instruct, this is

an iterative process that continues as long as the gain due to signalling is greater than

the signalling costs.

From the aspect of signalling theory, better performers use their sustainability

disclosure to distinguish themselves so that they may reap economic gains and pre-


empt potential/future regulations (Delmas & Montes Sancho, 2010). To send credible

signals about their better performance, firms arguably present sustainability disclosure

in ways that are difficult to be mimicked by their peers. Regarding the first six textual

characteristics, as signalling theory instructs, better performers are likely to disclose

information in a comprehensive way (more sustainability disclosure, more quantitative

information and more information about environmental impact); they are perceived to

‘talk’ in a less ambiguous tone, actively utilise a more optimistic tone and exhibit more

certainty in their tone. Some studies, including Al-Tuwaijri et al. (2004) (the US),

Freedman and Jaggi (2004) (the US) and Clarkson et al. (2008) (the US) and Marquis,

Toffel, and Zhou (2016) (an international study), lend support to signalling theory.

Prior studies into Australian firms support institutional theory. As Section 3.2

indicates, studies in Australia, including Deegan and Rankin (1996), Mitchell et al.

(2006) and Clarkson et al. (2011), identify that worse performers put more effort into

their disclosure. Studies in other regions, including Cho et al. (2010) (the US), Marquis

and Qian (2014) (China), and Kim and Lyon (2015) (the US), support institutional

theory as well.

Thus, institutional theory informs that disclosure obfuscates worse performance,

and signalling theory posits a positive relationship between sustainability disclosure

and sustainability performance. As these two arguments are backed up by prior studies,

respectively, Chapter 3 does not make a directional hypothesis, and prior literature in

Australia does not give an adequate empirical foundation for a directional hypothesis.

The first non-directional hypothesis is presented below.

H1 There is no relationship between sustainability performance and six textual

characteristics of sustainability disclosure, a) amount of disclosure (i.e. measured in

number of words), b) amount of quantitative information in disclosure (i.e. measured

by the Diction 7), c) amount of information in relation to environmental impact (i.e.

measured in number of words), d) tone of optimism in disclosure (i.e. measured by the

Diction 7), e) tone of certainty in disclosure (i.e. measured by the Diction 7), and f)

tone of clarity in disclosure (i.e. measured by the Diction 7).

This chapter develops a second hypothesis about readability of disclosure and

finds its theoretical foundation in the incomplete revelation hypothesis developed by

Bloomfield (2002, 2008). This hypothesis indicates that information, which is costlier

to extract from corporate communication, would be less comprehended and therefore


less absorbed by the audience (e.g. investors and other stakeholders). Information that

is costlier to extract exhibits lower readability (Loughran & McDonald, 2014a, 2014b,

2016). The literature about reliability of financial information, including Li (2008),

Bushee et al. (2017), and Jin, Luca, and Martin (2018), reveals that lower readability

of financial information is partially due to strategic decisions initiated by firms.

Following this silo of growing literature, Chapter 3 utilises incomplete revelation

hypothesis to develop the second hypothesis. Lower readability of sustainability

disclosure makes it more difficult for stakeholders to locate or uncover information

that firms attempt to hide (Bloomfield, 2002). It is thus reasonable to conjecture that

firms with better sustainability performance tend to present sustainability disclosure in

a more readable way (higher readability), ensuring that stakeholders comprehend their

performance in a less costly manner. While motivations behind why firms disclose

sustainability are reviewed by different and even conflicting theories31, a consensus

among them is that firms with superior performance are less likely to withhold their

performance. Better performers tend to present their performance in a more readable

way. Accordingly, the second hypothesis is shown below. The research design is

illustrated in following section.

H2 Readability of sustainability disclosure is positively related to sustainability

performance.

3.4 RESEARCH DESIGN

The sample period utilised in this thesis is between 2002 and 2016, as the

Thomson Reuters Asset4 covers Australian firms from 2002, and the data access ends

at 2016. As Section 3.1 indicates, data about sustainability performance was directly

extracted from the Thomson Reuters Asset4 (Asset4). I manually collected standalone

sustainability reports from the Sustainability Disclosure Database32 and various firms’

websites, and this collection took several months to undertake. If there were no

standalone reports, annual reports were examined to extract disclosure about corporate

sustainability. Control variables’ data were downloaded from Morningstar and

31 For example, socio-political theories consider legitimacy as a motivation behind voluntary

sustainability disclosure (Deegan, 2002), and voluntary disclosure theory is inclined to analyse

voluntary disclosure from the economic perspective (Clarkson et al., 2011). 32 Sustainability Disclosure Database is maintained by the GRI, and its URL is

http://database.globalreporting.org/.


Worldscope. This sample consists of Australian firms that are constituents of the ASX

200.33 In total, I collected 2,639 items of sustainability disclosures for testing the

hypotheses. In terms of the first hypothesis, after synthesizing databases and removing

missing data, there is a final sample of 2,076 firm-year observations. Regarding the

second hypothesis, as the data from I/B/E/S are included as an additional control

variable, after synthesizing databases and removing missing data, the sample decreases

to 2,067 firm-year observations. Following Beck et al. (2018), the Global Industry

Classification Standard (GICS) is used to classify sample firms into ten industries.

Panel A in Table 3-1 presents the industry distribution of the sample, and Panel

B in Table 3-1 shows the year distribution of the sample. Panel C in Table 3-1 reports

how this sample was reduced from 2,639. Samples analysed in this chapter are quite

comparable with the samples examined by Nguyen, Agbola, and Choi (2018) who also

used the Thomson Reuters Asset4 to analyse corporate sustainability in Australia. It is

reasonable to suggest that the two samples analysed in this chapter are representative

in terms of industry distribution, compared with the complete ASX200.

33 ASX 200 represents about 82% of the market capitalization on the ASX. More details about ASX

200 can be found at https://au.spindices.com/indices/equity/sp-asx-200, and access date is 13 May

2019.


Table 3-1 Sample Selection Panel A presents the sample distribution by industry, and Panel B presents the sample distribution by year. Panel C presents the synthesizing process of multiple databases.

Panel A Distribution of the First Sample Firms by Industry

Industrial Affiliation N Percent

Materials 501 24.13

Industrials 411 19.80

Financials 299 14.40

Energy 282 13.58

Consumer Discretionary 204 9.83

Consumer Staples 127 6.12

Health Care 122 5.88

Utilities 54 2.60

Information Technology 41 1.97

Telecommunication Services 35 1.69

Total 2076 100

Panel B Distribution of the First Sample Firms by Year

Year N Percent 2002 2 0.10

2003 2 0.10

2004 47 2.26

2005 55 2.65

2006 52 2.50

2007 57 2.75

2008 67 3.23

2009 152 7.32

2010 230 11.08

2011 249 11.99

2012 263 12.67 2013 255 12.28

2014 241 11.61

2015 218 10.50

2016 186 8.96

Total 2076 100

Panel C Sample Reduction Process

Observations

Observations available in the Thomson Reuters Asset4 (2002 – 2016) 2,639

LESS: missing data due to merging with Worldscope (191)

LESS: missing data due to merging with Morningstar (372)

Firm-year Observations for H1 2,076

LESS: missing data due to merge with I/B/E/S (9)

Firm-year Observations for H2 2,067

3.4.1 Corporate Sustainability Performance (CSP)

As suggested by Malik (2015) and Dragomir (2018), there are different ways to

operationalize sustainability performance. For instance, Galbreath and Shum (2012)

measure sustainability performance firm by firm by hiring experts’ opinion, and Lee,

Faff, and Langfield-Smith (2009), Humphrey, Lee, and Shen (2012) and Beck et al.

(2018) adopt ESG ratings from (rating) agencies to operationalize such performance.

As instructed by various seminal studies, including Ioannou and Serafeim (2010),


Cheng et al. (2014), Eccles, Ioannou, and Serafeim (2014), Lys et al. (2015), Michelon,

Pilonato, and Ricceri (2015) and Liang and Renneboog (2017), this chapter measures

sustainability performance according to the ESG ratings assigned by the Thomson

Reuters Asset434 (i.e. Asset4). Asset4 has a multilevel structure in its assessment: at

the first level, there are more than 750 data points for firms in its universe; at the middle

level, these data points are synthesized into more than 250 performance indicators; and

at the very top level, performance indicators are synthesized into categories that are

composed of four pillars, (1) environmental performance, (2) social performance, (3)

corporate governance performance and (4) economic performance. In the Australian

literature, Asset4 ESG ratings have been used by Biswas et al. (2018), Nguyen et al.

(2018) and Krishnamurti, Shams, and Velayutham (2018) to operationalize Australian

firms’ sustainability performance.

While I acknowledge that the Asset4 considers firms’ disclosure in measuring

how firms perform regarding sustainability performance, it includes other sources,

including news, stock exchange filings and NGOs’ information. Following the studies

of Ioannou and Serafeim (2010), Cheng et al. (2014), Eccles et al. (2014) and Nguyen

et al. (2018) that also use the ESG ratings/ scores of Asset4 to measure sustainability

performance, I measure firms’ sustainability performance by averaging environmental

score/performance and social score/performance (i.e. the mean of the first two pillars).

It is noteworthy that the third pillar, corporate governance performance/ score, is also

included as control. Regarding sub-categories, environmental performance/ score

consists of three sub-categories: (1) emission reduction, (2) product innovation, and

(3) resource reduction; social performance/ score has six sub-categories: (1) product

responsibility, (2) diversity and opportunity, (3) health and safety, (4) community, (5)

training and development, and (6) employment quality; and, corporate governance

performance/ score has five sub-categories: (1) board functions, (2) board structure,

(3) compensation policy, (4) vision and strategy, and (5) shareholder rights. Although

I do not use economic performance/ score in Chapter 3, I still introduce sub-categories

of economic performance/ score for a comprehensiveness purpose: (1) performance,

34 More information about the Thomson Reuters Asset4 can be found on

https://libguides.mit.edu/sustainablebusiness/asset4 and https://www.sri-

connect.com/index.php?option=com_comprofiler&Itemid=4&task=userProfile&user=1007283, and

access date is 24 January 2019.


(2) shareholder loyalty, and (3) client loyalty. The earliest available data is from 2002,

and the latest data ceases in 2016. The sub-categories of first two pillars are presented

in Figure 3-1. Figure 3-2 presents the second two pillars of Asset4, namely corporate

governance performance/ score and economic performance/ score. More details about

Asset4 are presented in Appendix A.

76Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability Performance

Figure 3-1 Asset4’s Scores Structure: Environmental Performance/Score and Social Performance/Score


Figure 3-2 Asset4’s Scores Structure: Corporate Governance Performance/Score and Economic Performance/Score


3.4.2 Textual Characteristics of Sustainability Disclosure

I extract sustainability disclosure from two mediums, standalone sustainability

reports and annual reports. If sample firms disclose sustainability information in two

mediums simultaneously, I consider standalone reports, as sustainability disclosure in

annual reports largely is summarised from/repeats the content of standalone reports.

Most of annual reports organize sustainability disclosure in individual sections with

very clear headings. Otherwise, Gray, Kouhy, and Lavers (1995a, 1995b), Clarkson et

al. (2008), Islam and McPhail (2011) and Global Reporting Initiative (2013b) are

consulted to examine which sections are relevant. It is noteworthy that this chapter

includes only words in its analysis, and pictures, figures and photos are disregarded.

Formatting in text (e.g. bold and font) are also disregarded. A sample of sustainability

disclosure analysed by this chapter is presented in Appendix B.

Standalone reports and relevant paragraphs in annual reports are converted to

TXT format and uploaded to the Diction 7 program for textual analysis. The reliability

and validity of Diction 7 has been assured, as seminal studies, including Short and

Palmer (2008), Henry (2006) and Henry and Leone (2016), have adopted this software

to perform textual analysis. Technical details about how it functions are provided in

Digitext (2015). As discussed in the introduction, Diction 7 measures the first six of

seven textual characteristics. The first three characteristics relate to content, namely

comprehensiveness of disclosure (measured by the number of words), amount of

quantitative information (measured by the score of numerical terms generated by the

Diction 7) and amount of environmental impact information (measured by number of

words).35 Comprehensiveness of disclosure (LENGTH) is calculated by Diction 7 for

each input. Aligning with Bagnoli, Hoffman, and Watts (2016), I measure the other

two constructs as the score of numerical terms and the z-score of frequency of key

words of environmental impact, respectively. Like LENGTH, they are outputs from

Diction 7.

The second three characteristics relate to tone of language in disclosure. As Cho

et al. (2010) instruct, optimism (OPTIMISM) and certainty (CERTAINTY) 36 refer to

35 This study does not consider social impact information, as there is no dictionary available in the

literature. 36 Following Cho et al. (2010, pp. 434), I consider optimism as “the bias toward reporting good news

coupled with a strategy that attributes positive performance to internal, corporate efforts”, and


the score of optimism and score of certainty, respectively, as calculated by Diction 7.

Following Resche (2004, 2015), minus one multiplied by the z-score of frequency of

key words of vagueness in language measures clarity (CLARITY) (i.e. −1 × the z −

score of frequency of key words about vagueness). An example of my outputs from

Diction 7 is presented in Appendix C.

Regarding readability of disclosure, sustainability disclosure is uploaded into the

R program for readability analysis. As instructed by Stone and Parker (2013) and Guay

et al. (2016), I extracted the first latent component from four readability indices,

namely the Flesch Reading Ease score (FRE), Coleman-Liau index (CLI), Flesch-

Kincaid Grade level (FKGL) and simple measure of gobbledygook (SMOG). This first

latent component is used as my measure of readability of sustainability disclosure. The

principal component analysis is provided in Appendix D.

3.4.3 Control Variables

Regarding control variables on sustainability performance, I control firm size

(SIZE), leverage (LEV), return on assets (ROA), newness of property, plant and

equipment (NEW), market-to-book ratio (MTB), capital expenditure (CAPEXP),

shareholding concentration (SHARECON), corporate governance (CG), presence of

social responsibility committee (CSR_C), existence of risk management committee

(RMC) and years of sustainability disclosure (YEAR_REPORT). A number of prior

studies, including Adams (2004), Al-Tuwaijri et al. (2004), Clarkson et al. (2008),

Clarkson et al. (2011), Delmas and Toffel (2011), Malik (2015), Dienes et al. (2016),

Khan, Serafeim, and Yoon (2016) and Jain and Jamali (2016), provide authority that

the above variables ought to be controlled. Larger firms are expected to have better

sustainability performance (Gallo & Christensen, 2011). Australian firms with higher

leverage or which incur more capital expenditure may invest less on sustainability, as

resources on hand can be restricted (Arora & Dharwadkar, 2011). Those with higher

market-to-book ratio may invest less on sustainability, as they hold more profitable

projects awaiting investment. Firms with the latest property, plant and equipment can

deliver better performance (Clarkson et al., 2008). As highlighted by Rankin et al.

(2011) and Jain and Jamali (2016), three governance variables are used as controls:

certainty as “language that indicates resoluteness, inflexibility, completeness, and a tendency to speak

ex cathedra”.


namely CSR_C, RMC and CG. Years of sustainability disclosure (YEAR_REPORT)

are also controlled, as firms with more experience tend to deliver better performance.

As Walls et al. (2012) and Jain and Jamali (2016) instruct, shareholding structure may

affect sustainability performance, and I control for shareholding concentration.

Regarding control variables on the first six textual characteristics of disclosure,

I control firm size (SIZE), leverage (LEV), market-to-book ratio (MTB), return on

assets (ROA), corporate governance (CG), presence of a risk management committee

(RMC), presence of a sustainability or social responsibility committee (CSR_C), and

shareholding concentration (SHARECON). Adams (2004), Delmas and Toffel (2011),

Malik (2015) and Dienes et al. (2016) provide authority that the aforementioned

variables ought to be controlled. Larger firms are more likely to assign resources to

sustainability disclosure (Patten, 2002). Leverage, market-to-book ratio and return on

assets may also reflect how firms allocate resources among different tasks, including

sustainability disclosure. As Jain and Jamali (2016) suggest, I control for shareholding

structure and corporate governance characteristics.

In terms of control variables relating to readability of sustainability disclosure, I

control firm size (SIZE), leverage (LEV), market-to-book ratio (MTB), return on

assets (ROA), number of analysts following (COVERAGE), cross listing (CROLIST),

and number of operational/business segments (BUSSEG). Loughran and McDonald

(2014b), Bonsall and Miller (2016) and Bushee et al. (2017) provide authority that the

aforementioned variables ought to be controlled. As Rutherford (2003), Lehavy et al.

(2011) and Jennings et al. (2014) suggest, I argue: firms with more business segments

disclose information that is more complex, reducing readability of disclosure without

strategic intention to do so. Variables and their measurements are presented in Table

3-2. Econometric models are explained in following section.


Table 3-2 Variables and Their Measurements Variable Abbr. Measurement Key Paper(s)

Sustainability Performance

Corporate

Sustainability

Performance

CSP Mean of environmental scores and social scores assigned by the Thomson Reuters Asset4 Ioannou and Serafeim (2010),

Cheng et al. (2014) and

Eccles et al. (2014)

Unexpected Part of

Sustainability

Performance

DA_CSP The unexpected/surprising part of sustainability performance reflects the variance in

sustainability performance that is not estimated by firm characteristics. This is the residual from

Equation (1).

Lys et al. (2015)

Textual Characteristics of Sustainability Disclosure

Amount of

Environmental Impact

Information

ENV_IM Frequency of key words about environmental impact calculated by Diction 7 (in z-score) Bagnoli et al. (2016)

Amount of

Quantitative

Information

NUMBER Score of numerical terms calculated by Diction 7 Bagnoli et al. (2016)

Comprehensiveness

of Sustainability

Disclosure

LENGTH Ln (Number of words) Cho et al. (2010)

Certainty in

Sustainability

Disclosure

CERTAINTY Certainty score calculated by Diction 7 Cho et al. (2010)

Clarity in

Sustainability Disclosure

CLARITY Frequency of key words about vagueness calculated by Diction 7 (in z-score) times minus one Resche (2004, 2015)

Optimism in

Sustainability

Disclosure

OPTIMISM Optimism score calculated by Diction 7 Cho et al. (2010) and Arena et

al. (2015)

Readability of

Sustainability

Disclosure

READ The first latent component extracted from four readability indices, namely Flesch Reading Ease

Score (FRE), Flesch-Kincaid Grade Level Score (FKGL), Coleman-Liau Index (CLI) and

Simple measure of Gobbledygook (SMOG), using principle component analysis. It is

noteworthy that to make interpretation easier and more consistent, this chapter times minus one

with some readability indices to make sure that the greater the readability score is, the sentence

is more readable.

Guay et al. (2016)


Variable Abbr. Measurement Key Paper(s)

Control Variables on Sustainability Performance

Capital Expenditure CAPEXP Capital Expenditure

Total Assets

Clarkson et al. (2008) and

Clarkson et al. (2011)

Corporate

Governance Index

CG Corporate governance scores assigned by the Thomson Reuters Asset4 Rankin et al. (2011)

Experience of

Sustainability

Disclosure

YEAR_REPORT Number of years that a firm has released its sustainability disclosure Dienes et al. (2016)

Firm Size SIZE Ln Market Capitalization Clarkson et al. (2008) and


Leverage LEV Total Liabilities

Total Assets

Dienes et al. (2016)

Market-to-book Ratio MTB Market Capitalization

Book Value


Newness of Property, Plant and Equipment

NEW Net Property, Plant and Equipment

Gross Property, Plant and Equipmen

Al-Tuwaijri et al. (2004) and Clarkson et al. (2008)

Return on Assets ROA Reported Net Profit After Tax

Total Assets

Al-Tuwaijri et al. (2004) and


Risk Management

Committee

RMC Presence of a risk management committee Jain and Jamali (2016)

Shareholding

Concentration

SHARECON Percentage of ordinary shares owned by Top 20 shareholders Dienes et al. (2016)

Sustainability/ Social Responsibility

Committee

CSR_C Presence of a sustainability/social responsibility committee Jain and Jamali (2016)



Control Variables on the First Six Textual Characteristics of Sustainability Disclosure

Corporate

Governance Index

CG Corporate governance scores assigned by Thomson Reuters Asset4 Rankin et al. (2011) and

Arena et al. (2015)

Firm Size SIZE Ln Market Capitalization Dienes et al. (2016), Cho et

al. (2010) and Arena et al.

(2015)


Total Assets

Clarkson et al. (2008) and



Book Value

Dienes et al. (2016) and

Arena et al. (2015)


Total Assets

Al-Tuwaijri et al. (2004),

Clarkson et al. (2008), Cho et al. (2010) and Arena et al.

(2015)

Risk Management

Committee

RMC Presence of a risk management committee Jain and Jamali (2016)

Shareholding

Concentration

SHARECON Percentage of ordinary shares owned by Top 20 shareholders Dienes et al. (2016)

Sustainability/ Social

Responsibility

Committee

CSR_C Presence of a sustainability/social responsibility committee Jain and Jamali (2016)



Control Variables on Readability of Sustainability Disclosure

Analyst Coverage COVERAGE Number of analysts issuing earnings forecast for a firm in a year Bonsall and Miller (2016) and

Bushee et al. (2017)

Cross Listing CROLIST An indicator variable that takes one if a firm is listed on a foreign stock exchange. Bonsall and Miller (2016) and


Firm Size SIZE Ln Market Capitalization Bonsall and Miller (2016),

Bushee et al. (2017) and

Wang et al. (2018)


Total Assets

Bonsall and Miller (2016),

Bushee et al. (2017) and

Wang et al. (2018)


Book Value

Bonsall and Miller (2016) and Bushee et al. (2017)

Number of Business

Segment

BUSSEG Number of business segments Lehavy et al. (2011), Jennings

et al. (2014) and Wang et al.

(2018), Return on Assets ROA Reported Net Profit After Tax

Total Assets

Bonsall and Miller (2016) and



3.4.4 Econometric Models

Following Lys et al. (2015), I use a two-step approach to test two hypotheses.

The first equation aims to estimate the unexpected/surprising part of sustainability

performance (𝜀𝑖,𝑡), the residual of the first equation. Arguably, it is the unexpected part

of sustainability performance that needs to be better explained and provokes strategic

adjustments in sustainability disclosure. Thus, the unexpected part of performance is

tightly related to changes in textual characteristics of disclosure.

The second equation tests the relationship between the unexpected part of

performance and the seven textual characteristics of disclosure. If the dependent

variable is the amount of environmental-impact information, the unexpected part of

environmental performance is used. I use panel regression with robust standard errors

in the analyses, and time and industry fixed effects also are considered.

Regarding concerns relating to endogeneity, as suggested by Kennedy (2008),

Schultz, Tan, and Walsh (2010), Antonakis, Bendahan, Jacquart, and Lalive (2010),

Wintoki, Linck, and Netter (2012) and Gippel, Smith, and Zhu (2015), endogeneity is

due to several reasons, including omitted variables, omitted selection, simultaneity and

model misspecification. Arguably, by consulting the literature on sustainability and

using fixed effects, it is reasonable to suggest that omitted variables do not necessarily

cause endogeneity, as important control variables are included, and fixed effects are

considered. Moreover, focus on the unexpected part of sustainability performance

further minimizes effects of omitted variables. With respect to simultaneity, it is hard

to theoretically argue that unexpected part of sustainability performance and textual

characteristics of disclosure simultaneously cause each other. Following Arena et al.

(2015) and Lys et al. (2015), I apply the Granger Causality tests and alternative model

specification to mitigate the likelihood of endogeneity.

In terms of robustness tests, I use principal component analysis to re-measure

sustainability performance by extracting a latent component from nine sub-categories

mentioned in Section 3.5.1 and Figure 3-1. How three disclosure contexts, namely

sectoral environment, disclosure channels and time stability, influence relationships

between textual characteristics of disclosure and firms’ sustainability performance are

considered. Equations are presented below. The first equation is used to estimate the


unexpected part of performance37, the second equation is used to test the first

hypothesis (H1), and the third equation is used to test the second hypothesis (H2).

Findings are discussed in following section.

(1) 𝐶𝑆𝑃𝑖,𝑡 = 𝑏0 + 𝑏1𝑌𝐸𝐴𝑅_𝑅𝐸𝑃𝑂𝑅𝑇𝑖,𝑡 + 𝑏2𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑏3𝑅𝑂𝐴𝑖,𝑡 + 𝑏4𝑀𝑇𝐵𝑖,𝑡 + 𝑏5𝑁𝐸𝑊𝑖,𝑡 +

𝑏6𝐿𝐸𝑉𝑖,𝑡 + 𝑏7𝐶𝐴𝑃𝐸𝑋𝑃𝑖,𝑡 + 𝑏8𝐶𝐺𝑖,𝑡 + 𝑏9𝑆𝐻𝐴𝑅𝐸𝐶𝑂𝑁𝑖,𝑡 + 𝑏10𝐶𝑆𝑅_𝐶𝑖,𝑡 + 𝑏11𝑅𝑀𝐶𝑖,𝑡 +

𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡

(2) 𝐿𝐸𝑁𝐺𝑇𝐻 𝑜𝑟 𝑁𝑈𝑀𝐵𝐸𝑅 𝑜𝑟 𝐸𝑁𝑉_𝐼𝑀 𝑜𝑟 𝑂𝑃𝑇𝐼𝑀𝐼𝑆𝑀 𝑜𝑟 𝐶𝐸𝑅𝑇𝐴𝐼𝑁𝑇𝑌 𝑜𝑟 𝐶𝐿𝐴𝑅𝐼𝑇𝑌𝑖,𝑡 =

𝑏0 + 𝑏1𝐷𝐴_𝐶𝑆𝑃𝑖,𝑡 + 𝑏2𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑏3𝑅𝑂𝐴𝑖,𝑡 + 𝑏4𝑀𝑇𝐵𝑖,𝑡 + 𝑏5𝐿𝐸𝑉𝑖,𝑡 + 𝑏6𝐶𝐺𝑖,𝑡 +

𝑏7𝑆𝐻𝐴𝑅𝐸𝐶𝑂𝑁𝑖,𝑡 + 𝑏8𝐶𝑆𝑅_𝐶𝑖,𝑡 + 𝑏9𝑅𝑀𝐶𝑖,𝑡 + 𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡

(3) 𝑅𝐸𝐴𝐷𝑖,𝑡 = 𝑏0 + 𝑏1𝐷𝐴_𝐶𝑆𝑃𝑖,𝑡 + 𝑏2𝑀𝑇𝐵𝑖,𝑡 + 𝑏3𝐿𝐸𝑉𝑖,𝑡 + 𝑏4𝐵𝑈𝑆𝑆𝐸𝐺𝑖,𝑡 +

𝑏5𝐶𝑂𝑉𝐸𝑅𝐴𝐺𝐸𝑖,𝑡 + 𝑏6𝐶𝑅𝑂𝐿𝐼𝑆𝑇𝑖,𝑡 + 𝑏7𝑅𝑂𝐴𝑖,𝑡 + 𝑏5𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡

3.5 RESULTS

3.5.1 Descriptive Statistics

Descriptive statistics of the two samples and correlation matrix of key variables

are tabulated below. As Panel A of Table 3-3 indicates, independent and dependent

variables display much variance. It is interesting to identify that the first sample has a

higher optimism score (51.44) than the sample examined in Cho et al. (2010) whose

average optimism score is 48.21 and the sample used in Arena et al. (2015) whose

average optimism score is 46.81 (see Panel A, Table 3-3). The average readability of

sustainability disclosure in the second sample is not high. For instance, the mean of

the Flesch Reading Ease Score (FRE) is 33.78, suggesting that disclosure users make

significant effort to understand the disclosure (see Panel A, Table 3-3). As indicated

by Panel B of Table 3-3, over half of the sample firms have a risk management

committee, and about one fifth of sample firms have a social responsibility committee.

Compared with the samples examined in Clarkson et al. (2011) and Herbohn et al.

(2014), firms in this sample have lower return on assets yet comparable asset newness

(see Panel C of Table 3-3). Compared with the samples investigated in Lanis and

Richardson (2012a, 2012b), sample firms have a relatively higher leverage ratio. On

average, sample firms consist of five business segments and have about nine following

analysts (see Panel C, Table 3-3). The correlation matrix of variables is presented in

37 Unexpected part of sustainability performance (DA_CSP) is the residual from Equation (1).


Table 3-4. It is interesting to notice that firms’ sustainability performance is positively

related to the textual characteristics concerned in here.

Table 3-3 Descriptive Statistics Variables described in Table 3-2 except as follows. Instead of reporting ENV_IM and CLARITY,

frequency of key words regarding environmental impact and vagueness are presented. FRE is Flesch

Reading Ease Score. FKGL represents Flesch-Kincaid Grade Level Score. CLI is Coleman-Liau

Index, and SMOG represents a simple measure of Gobbledygook. Panel A represents key variables,

Panel B reports the presence of a risk management committee and of a social responsibility

committee, and Panel C shows control variables.

Panel A Key Variables

Variable No MEAN STD.DEV MIN MAX

CSP 2076 39.03 26.28 0 97.885 ENV_IM (Frequency of Key Words

about Environmental Impact)

2076 11.76 9.29 0 78.95

NUMBER 2076 20.40 26.29 0 363.64

LENGTH (Number of Words) 2076 4482.67 9311.52 11 112602

CERTAINTY 2076 49.72 4.74 25.32 69.32

CLARITY (Frequency of Key Words

about Vagueness)

2076 121.10 34.94 0 241.93

OPTIMISM 2076 51.44 2.35 42.89 58.96

A Sub-measure of READ: CLI 2067 15.14 15.44 0 472.80

A Sub-measure of READ: FKGL 2067 11.49 1.87 0 29.56

A Sub-measure of READ: FRE 2067 33.78 11.01 0 122.21 A Sub-measure of READ: SMOG 2067 13.32 1.62 0 24.50

Panel B Frequency of a Risk Management Committee and a Social Responsibility Committee in

the First Sample

TOTAL PERCENTAGE

CSR_C 362 17.44

RMC 1068 51.45

Panel C Control Variables

Variable No MEAN STD.DEV MIN MAX

BUSSEG 2067 4.76 2.45 0 10

COVERAGE 2067 8.99 4.86 0 23

CROLIST 2067 0.45 0.50 0 1

CAPEXP 2076 0.08 0.11 0.00 1.00

CG 2076 61.82 26.65 0.00 97.51

LEV 2076 0.45 0.24 0.004 1.32

Market Capitalization (in Billions) 2076 4.30 0.03 4.22 4.38 MTB 2076 2.12 2.91 -28.43 38.11

NEW 2076 0.63 0.23 0.00 1.00

ROA 2076 0.02 0.21 -1.69 2.54

SHARECON 2076 62.83 24.04 0.00 97.39

YEAR_REPORT 2076 4.02 3.21 0.00 14


Table 3-4 Correlation Matrix of Variables A correlation matrix of variables is presented in this table. The variables tabulated below are described in Panel A and C of Table 3-2, as they are continuous variables.

Variables in Panel B of Table 3-2 are not included, as they are dummy variables. Variable CSP LENGTH NUMBER ENV IM OPTIMISM CERTAINTY CLARITY FRE FKGL SOMG CLI

CSP 1 LENGTH 0.457*** 1 NUMBER 0.245*** 0.268*** 1 ENV_IM 0.184*** 0.121*** 0.113*** 1

OPTIMISM -0.021 -0.112*** -0.071*** -0.030 1 CERTAINTY 0.318*** -0.260*** 0.457*** -0.104*** 0.000 1 CLARITY 0.129*** 0.201*** 0.229*** 0.030 -0.100*** 0.127*** 1 FRE 0.270*** 0.196*** 0.207*** -0.055*** 0.211*** -0.199*** 0.174*** 1 FKGL 0.284*** 0.235*** 0.228*** -0.033* 0.189*** -0.214*** 0.231*** 0.936*** 1 SOMG 0.270*** 0.292*** 0.268*** 0.003 0.090*** -0.256*** 0.288*** 0.600*** 0.812*** 1 CLI 0.032 0.154*** 0.040** -0.003 -0.023 -0.044** 0.064*** 0.110*** 0.144*** 0.215*** 1 SIZE 0.553*** 0.414*** 0.138*** 0.145*** -0.005 -0.24*** 0.079*** 0.178*** 0.195*** 0.206*** 0.030

LEV -0.112 -0.007 -0.013 -0.015 -0.023 0.008 -0.017 0.011 0.009 0.004 -0.001 ROA 0.024 -0.01 0.003 -0.013 0.005 -0.003 0.013 0.022 0.035* 0.036* -0.002 MTB 0.013 -0.022 -0.003 -0.021 -0.001 0.008 0.010 0.017 0.029 0.028 -0.003 NEW -0.124*** 0.007 -0.014 0.027 -0.024 0.021** -0.075*** -0.063*** -0.051*** 0.018 0.005 CAPEXP -0.010 -0.019 -0.006 -0.030 -0.003 0.013 0.009 0.005 0.019 -0.059*** -0.003 CG 0.555*** 0.316*** 0.183*** 0.137*** -0.005 -0.235*** 0.077*** 0.195*** 0.215*** 0.202*** 0.036* SHARECON 0.020 -0.019 0.002 -0.126*** 0.012 -0.028 0.007 0.015 0.014 0.011 0.015 YEAR_REPORT 0.483*** 0.291*** 0.182*** 0.096*** -0.051*** -0.229*** 0.116*** 0.138*** 0.152*** 0.159*** -0.005

CROLIST -0.034* -0.009 0.017 0.005 0.054*** 0.010 -0.007 0.041** 0.023 0.009 0.027 BUSSEG 0.444*** 0.286*** 0.106*** 0.081*** -0.016 -0.176*** 0.097*** 0.148*** 0.157*** 0.150*** 0.002 COVERAGE 0.495*** 0.293*** 0.168*** 0.102*** -0.017 -0.229*** 0.097*** 0.165*** 0.178*** 0.181*** 0.042**

SIZE LEV ROA MTB NEW CAPEXP CG SHARECON YEAR_REPORT CROLIST BUSSEG

SIZE 1 LEV -0.054*** 1 ROA 0.108*** -0.019 1

MTB 0.061*** -0.002 0.990*** 1 NEW -0.001 -0.128*** 0.086*** 0.086*** 1 CAPEXP 0.042** -0.001 0.981*** 0.991*** 0.117*** 1 CG 0.373*** -0.009 0.019 0.009 -0.109*** -0.001 1 SHARECON 0.019 -0.087*** -0.019 -0.024 -0.141*** -0.022 0.044** 1 YEAR_REPORT 0.304*** 0.014 0.039** 0.044** -0.202*** 0.018 0.355*** 0.077*** 1 CROLIST 0.030 -0.017 0.036* 0.036* 0.018 0.042** -0.048** 0.027 -0.150*** 1 BUSSEG 0.516*** -0.003 0.116*** 0.094*** -0.100*** 0.076*** 0.332*** 0.024 0.256*** 0.004 1

COVERAGE 0.653*** 0.315*** 0.092*** 0.064*** -0.122*** 0.040* 0.447*** 0.120*** 0.440*** -0.030 0.362***

***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level


3.5.2 Equation (1) – Unexpected Part of Sustainability Performance (DA_CSP)

Findings derived from Equation (1) are tabulated below. As indicated by Table

3-5, firm size (Serafeim, 2013), corporate governance (Walls et al., 2012), years of

sustainability disclosure, and the presence of a social responsibility committee (Rankin

et al., 2011) are positively related to sustainability performance. Leverage is negatively

related to firms’ sustainability performance. Sample firms with higher leverage hold

less organizational slack, restricting sustainability investment (Arora & Dharwadkar,

2011). Krishnamurti and Velayutham (2017) find the existence of a risk management

committee is related to the disclosure of greenhouse gas emissions, yet this board

committee is found to have insignificant active impact on such performance. In terms

of economic significance, a one standard-deviation increase in firm size relates to a

4.44% increase in the performance; and economic significance of the other significant

variables also is apparent. The findings in relation to two hypotheses are presented in

following section.


Table 3-5 Equation (1) – Unexpected Part of Sustainability Performance (DA_CSP) This table presents findings regarding Equation (1) that aims to estimate the unexpected part of sustainability performance (DA_CSP). Variables in this table are described in Table 3-2. In terms of

model fit, the Equation (1) arguably is fit, as the adjusted R-square is 0.62 that is comparable with

adjusted R-squares reported by prior studies.

CSP

Coeff.

(t-stat)

YEAR_REPORT 4.32

(8.65)***

RMC 0.09

(0.10)

CSR_C 6.16

(2.66)***

SIZE 1.48

(2.49)** LEV -3.49

(-1.67)*

ROA 0.001

(0.09)

MTB 0.01

(0.52)

NEW -0.85

(-1.01)

CAPEXP -0.01

(-0.68)

CG 0.26 (9.49)***

SHARECON 0.02

(0.60)

CONS -22.78

(-3.27)***

Year FE YES

Industry FE YES

Observations 2076

Adjusted R-square 0.62


3.5.3 Equation (2) – H1

Findings of H1 are tabulated below. As indicated by Table 3-6 (column 1 – 6),

the unexpected part of sustainability performance (DA_CSP) positively relates to the

first six textual characteristics. In terms of economic significance38, a one standard-

deviation increase in DA_CSP is related to a 32% increase in sustainability disclosure

(LENGTH) and is related to a 3.72% increase in quantitative information (NUMBER).

A one standard-deviation rise in the unexpected part of environmental performance

38 In terms of how to calculate economic significance, this chapter follows Miller (2005) and Gul,

Hutchinson, and Lai (2013).


relates to an 18% increase in amount of environmental-impact information (ENV

_IM). A one standard-deviation increase in DA_CSP is related to a 65% increase in

tone of certainty (CERTAINTY), a 16% increase in tone of optimism (OPTIMISM)

and a 16% increase in tone of clarity (CLARITY). In terms of control variables, firm

size and status of corporate governance are positively related to the above textual

characteristics of disclosure. Thus, H1 is rejected.


Table 3-6 H1 and H2 This table presents results regarding analysis of the relationship between the unexpected part of sustainability performance (DA_CSP) and the seven textual characteristics of

sustainability disclosure. The unexpected part of environmental performance is estimated by replacing sustainability performance with environmental performance in

Equation (1). Variables tabulated below are described in Table 3-2. In terms of model fit, Equation (2) is based on instruction from prior studies, and the proportion of

variance is comparable with proportion of variance explained by prior studies; Equation (3) is based on instruction from prior studies, and he proportion of variance is

comparable with proportion of variance explained by prior studies.

(1) (2) (3) (4) (5) (6) (7)

LENGTH NUMBER ENV_IM OPTIMISM CERTAINTY CLARITY READ

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

DA_CSP 0.02

(10.93)***

0.23

(3.95)***

0.01

(3.72)***

0.01

(2.53)**

0.04

(4.13)***

0.01

(4.08)***

0.017

(3.12)***

RMC -0.01

(-0.02)

-2.27

(-1.49)

0.03

(0.57)

0.30

(2.15)**

0.09

(0.35)

0.09

(1.81)*

-

CSR_C 0.42

(4.62)***

6.68

(1.89) *

0.05

(0.71)

0.38

(1.60)

-0.52

(-1.43)

0.14

(1.91)*

-

SIZE 0.30

(11.06)***

0.23

(3.95) ***

0.04

(1.88)*

0.09

(1.01)

0.03

(5.19)***

-0.04

(-1.58)

0.120

(1.89)*

LEV 0.16

(0.94)

-4.34

(-0.98)

0.04

(0.36)

-0.14

(-0.32)

0.04

(1.39)

0.08

(0.58)

0.012

(0.05)

ROA 0.00

(-0.90)

0.02

(0.81)

0.00

(0.23)

0.00

(0.94)

0.00

(1.08)

0.00

(-0.11)

0.129

(0.56)

MTB 0.00

(1.86)*

-0.01

(-0.43)

0.00

(0.31)

0.02

(2.19)**

0.00

(-0.63)

0.00

(0.60)

-0.000

(-0.75)

CG 0.00 (-1.98)*

0.10 (2.70)***

0.00 (-0.88)

0.002 (0.65)

-0.10 (-0.09)

0.00 (-0.67)

-

SHARECON 0.01

(7.43)***

-0.05

(-1.79)

0.00

(0.90)

0.001

(0.49)

0.01

(1.79)*

0.00

(-1.04)

-

CROLIST - - - - - - 0.067

(0.89)

BUSSEG - - - - - - -0.019

(-0.54)

COVERAGE - - - - - - 0.004

(0.29)

CONS 0.00 6.23 0.00 0.01 0.00 0.00 -2.937


(-2.12)** (0.32) (-2.50)** (1.80)* (-1.64) (-0.95) (-2.23)

Year FE YES YES YES YES YES YES YES

Industry FE YES YES YES YES YES YES YES

Observations 2076 2076 2076 2076 2076 2076 2067

Adjusted R-square 0.48 0.12 0.08 0.03 0.16 0.09 0.08



From a theoretical perspective, the above findings lend support to signalling

theory. Firms prepare their disclosure in a way that distinguishes themselves regarding

CSP. As Table 3-6 shows, firms with better sustainability performance (environmental

performance) disclose more sustainability information, more quantitative information

and more information in relation to environmental impact. They also communicate in

clear, optimistic and certain tones.

Regarding practical implications, the findings reported in Chapter 3 are related

to greenwashing, a practical phenomenon that has been discussed by researchers who

are interested in institutional theory. If greenwashing is defined as an intersection of

two activities, (1) worse sustainability performance and (2) positive disclosure about

sustainability performance (Delmas & Burbano, 2011), findings do not lend support

to the presence of greenwashing. If it includes “any communication that misleads

people into adopting overly positive beliefs about” a firm’s sustainability practices,

products and performance39 (Lyon & Montgomery, 2015, p. 226), the findings of

Chapter 3 are still insufficient, as identifying and quantifying how readers perceive

disclosure is required to detect greenwashing (this problem is outside of the scope of

this thesis). Findings of H2 are discussed in following section.

3.5.4 Equation (3) – H2

The findings of H2 are presented in Table 3-6. As presented in Table 3-6 (column

7), the unexpected part of sustainability performance (DA_CSP) is positively related

to readability of sustainability disclosure (READ). H2 is not rejected, as β = 0.017

(p<0.01). In other words, better performers communicate sustainability disclosure in a

more readable way. With respect to economic significance, a one standard-deviation

increase in DA_CSP is related to a 4.08% increase in READ. Findings are consistent

with the incomplete revelation hypothesis of Bloomfield (2002, 2008) wherein better

performers present disclosure in a more readable way so that their stakeholders more

easily understand their performance. What I found also is consistent with Wang et al.

(2018). As mentioned in Section 3.3, Wang et al. (2018), via analysing a quite small

US sample, identified a positive relationship between sustainability performance and

39 Two definitions about greenwashing are paraphrased from definitions proposed by Delmas and

Burbano (2011) and Lyon and Montgomery (2015), respectively, as their definitions consider

environmental performance only, rather than sustainability performance in a more inclusive way.


readability of sustainability disclosure. In the following sections, some robustness tests

are conducted to see whether the findings of the two hypotheses are robust.

3.5.5 Robustness Test One – Signalling Effect of Textual Characteristics in

Sustainability Disclosure

As the Eq (2) and (3) consider the relationship between textual characteristics

and the unexpected part of sustainability performance in the same period, this section

investigates whether the unexpected part of sustainability performance affects textual

characteristics in following periods, and vice versa. As Granger (1969), Granger and

Newbold (1974), Dufour and Taamouti (2010) and Arena et al. (2015) instruct, this

section uses panel Granger causality tests to check whether textual characteristics of

disclosure (LENGTH, NUMBER, ENV_IM, CLARITY, CERTAINTY, OPTIMISM

and READ) relate to performance in different periods, and vice versa. As Arena et al.

(2015) instruct, I consider one-year and two-year lags in these tests: performance may

affect textual characteristics of disclosure in the following year and two years, and vice

versa. Findings are presented below in Tables 3-7.


Table 3-7 Signalling Effects of Textual Characteristics in Sustainability Disclosure This table presents the results of signalling effects of the seven textual characteristics on sustainability performance. Following Choi (2001), unit root tests for panel data are

conducted and reported in Panel A. Panel B presents results of panel Granger causality tests. One period of lag and two periods of lag are considered. In the Granger causality

test of ENV_IM, unexpected part of sustainability performance is replaced by unexpected part of environmental performance. Variables tabulated below are described in

Table 3-2.

Panel A: Fisher-type Augmented Dickey-Fuller Tests for Panel Data

Variable p-value

CERTAINTY 0.00

CLARITY 0.00

DA_CSP 0.00

ENV_IM 0.00

LENGTH 0.00

NUMBER 0.00

OPTIMISM 0.00 READ 0.00

Panel B: Granger Causality Tests (the Chi probability is reported)

Unexpected part of sustainability

performance does not Granger

cause a textual characteristic

(One Lag)

A textual characteristic does not

Granger cause unexpected part

of sustainability performance

(One Lag)

Unexpected part of sustainability

performance does not Granger

cause a textual characteristic

(Two Lag)

A textual characteristic does not

Granger cause unexpected part of

sustainability performance

(Two Lag)

CERTAINTY 0.357 0.812 0.558 0.950

CLARITY 0.186 0.814 0.401 0.597

ENV_IM 0.374 0.107 0.987 0.254

LENGTH 0.765 0.516 0.675 0.519

NUMBER 0.287 0.685 0.815 0.187

OPTIMISM 0.738 0.907 0.985 0.512

READ 0.721 0.129 0.219 0.176


Panel A of Table 3-7 presents the Augmented Dickey-Fuller test (Choi, 2001):

the variables concerned are stationary. Panel B of Table 3-7 presents the findings of

the panel Granger causality tests. With respect to the first six textual characteristics, as

the critical value for one period of lag is 𝜒2 (1, N = 2076) = 3.841 and for two periods

of lag is 𝜒2 (1, N = 2076) = 5.991, it is obvious that there is no relationship between

sustainability performance and the lags in different time periods. Similar findings

regarding the seventh textual characteristic are also revealed: as the critical value for

one period of lag is 𝜒2 (1, N = 2067) = 3.841 and for two periods of lag is 𝜒2 (1, N =

2067) = 5.991, there is no relationship between sustainability performance and the

seventh characteristic over different time periods. Thus, the findings of two hypotheses

are substantiated.

3.5.6 Robustness Test Two – Alternative Measurement on Sustainability

Performance

In the main analysis of that two hypotheses, firms’ sustainability performance is

measured as an average of social score and environmental score. I use the principal

component analysis to extract a latent component from nine sub-categories which are

composed of a social score and an environmental score (see Section 3.4.1and Figure

3-1). It is used as the alternative measurement on sustainability performance in Chapter

3. The findings are presented below. As Table 3-8 indicates, the findings about the two

hypotheses remain qualitatively unchanged.


Table 3-8 Alternative Measurement on Sustainability Performance This table presents the results of the relationship between unexpected part of sustainability performance and seven textual characteristics of sustainability disclosure. Panel A

shows alternative measurement of sustainability performance based on the principal component analysis. Panel B shows the results of the relationship between alternative

measurement on the unexpected part of sustainability performance and seven textual characteristics of sustainability disclosure. Environmental performance is calculated by

extracting a latent component from the three sub-categories comprising it. The unexpected part of environmental performance is estimated by replacing sustainability

performance with environmental performance in Equation (1).

Panel A: Principal Component Analysis on Nine Sub-Categories of Sustainability Performance

Sub-Categories Eigenvalue Loading Proportion Cumulative

Resource Reduction 4.974 0.55 0.553 0.553

Emission Reduction 0.749 0.08 0.083 0.636

Product Innovation 0.718 0.08 0.080 0.716

Employment Quality 0.628 0.07 0.070 0.786

Health and Safety 0.510 0.06 0.057 0.842

Training and Development 0.485 0.05 0.054 0.896 Diversity and Opportunity 0.377 0.04 0.042 0.938

Community 0.374 0.04 0.042 0.980

Product Responsibility 0.184 0.02 0.021 1.000

Panel B: Panel Regression


Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

DA_CSP (Alternative) 0.31

(10.36)***

2.90

(5.02)***

0.09

(3.83)***

0.11

(1.72)*

0.03

(4.97)***

0.07

(3.43)***

0.022

(3.12)***

RMC 0.02

(0.25)

-1.60

(-1.17)

0.03

(0.46)

0.27

(1.92)*

-0.03

(-0.25)

0.08

(1.72)*

-

CSR_C 0.17

(1.43)

3.47

(1.38)

0.03

(0.36)

0.45

(1.88)*

0.01

(0.49)

0.14

(1.89)*

-

SIZE 0.20

(6.08)***

0.31

(0.41)

0.02

(0.53)

0.11

(1.24)

0.02

(2.88)***

0.03

(1.45)

0.077

(1.59)

LEV -0.02

(-0.11)

-3.68

(-1.09)

0.01

(0.04)

-0.11

(-0.24)

0.02

(0.59)

0.09

(0.07)

0.072

(0.32)

ROA -0.00

(-1.01)

0.01

(0.37)

0.00

(0.03)

0.00

(0.90)

0.00

(0.85)

0.00

(0.07)

0.069

(0.30)

MTB 0.00

(0.95)

-0.01

(-0.51)

0.00

(0.41)

0.02

(2.22)**

-0.00

(-0.74)

0.00

(0.73)

-0.000

(-1.10)


CG 0.01

(3.09) ***

0.02

(0.52)

0.00

(0.22)

0.002

(0.84)

0.00

(0.48)

-0.00

(-0.94)

-

SHARECON 0.01

(1.23)

-0.05

(-1.97)*

-0.00

(-1.92)

0.01

(1.89)*

-0.01

(-1.34)

-0.00

(-0.87)

-

CROLIST - - - - - - 0.087

(1.29)

BUSSEG - - - - - - -0.022

(-0.78)

COVERAGE - - - - - - 0.002

(0.13)

CONS 0.00 (-2.12)**

7.09 (1.09)

0.29 (-0.45)

8.29 (28.45)***

-1.25 (-10.33)***

0.03 (-0.05)

-1.888 (-1.86)



Observations 2076 2076 2076 2076 2076 2076 2,067




3.5.7 Robustness Test Three – Sectoral Analysis

Following Cho and Patten (2007) and Eccles et al. (2014), this test categorises

the GICS industries into two pairs of categories, (1) natural versus non-natural40; (2)

business-to-consumer (B2C) and others41. In terms of the first pair, I code the value of

one for industries whose products are deemed as sensitive to sustainable development

(the natural industries), and the value of zero otherwise (the non-natural industries)

(De Villiers, Naiker, & Van Staden, 2011). It is argued that firms in the natural

industries are subject to more pressures relevant to sustainability (Cho, Laine, Roberts,

& Rodrigue, 2015) so that the relationship between how firms communicate about

sustainability and how firms perform sustainability can consequentially be affected by

such pressures. With respect to the second pair, the value of one is coded for B2C

industries and zero otherwise. Following Eccles et al. (2014), it is argued that firms in

the B2C industries are more visible as they directly interact with consumers. Thus,

firms in the B2C industries are more likely to care about their image and reputation

than their peers in other industries. The relationship between textual characteristics

and performance can be affected by such concerns. The findings are presented in Table

3-9. Panel A of Table 3-9 shows natural versus non-natural, and Panel B of Table 3-9

reports B2C versus others.

40 Following de Villiers, Naiker and Van Staden (2011, p. 1650), natural industries include forestry,

metal mining, coal mining and oil and gas exploration, paper and pulp mills, chemicals,

pharmaceutical and plastics manufacturing, iron and steel, manufacturing and electricity, gas and

wastewater. 41 Following Eccles et al. (2014, p. 2850), B2C industries include consumer goods and finance.


Table 3-9 Sectoral Analysis This table presents the results of sectoral moderation effects on the relationship between unexpected part of sustainability performance and seven textual characteristics of

sustainability disclosure. They are the number of words (LENGTH), the amount of quantitative information (NUMBER), the amount of environmental impact information

(ENV_IM), optimism (OPTIMISM), certainty (CERTAINTY), clarity (CLARITY) and readability (READ). Panel A presents how industry affiliation based on natural versus

non-natural affects the relationship between performance and textual characteristics. Natural is coded as a dummy variable – firms in natural industries are coded one, and

zero otherwise. Panel B presents how industry affiliation based on B2C versus others affects such relationship. B2C is coded as a dummy variable – firms in B2C industries

are coded one, and zero otherwise. Variables tabulated below are described in Table 3-2. Panel A Natural versus Non-natural


Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

DA_CSP 0.14 (2.75)***

0.27 (3.79)***

0.01 (2.69)***

-0.01 (-1.22)

0.14 (2.75)***

0.01 (4.20)***

0.028 (2.93)***

Natural -0.43 (-1.16)

4.01 (1.34)

-0.08 (-0.64)

0.10 (0.30)

-0.43 (-1.16)

-0.21 (-1.28)

0.146 (0.13)

Natural × DA_CSP 0.09 (1.12)

-0.09 (-0.76)

0.00 (-0.14)

0.03 (2.98)***

0.09 (1.12)

0.004 (1.29)

-0.013 (-1.45)

Controls included YES YES YES YES YES YES YES Year FE YES YES YES YES YES YES YES

Observations 2076 2076 2076 2076 2076 2076 2067 Adjusted R-square 0.16 0.12 0.08 0.04 0.16 0.10 0.02

Panel B B2C versus Others


Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

DA_CSP 0.02

(9.11)***

0.18

(2.55)**

0.01

(2.58)**

0.01

(2.66)***

0.21

(4.39)

0.01

(2.32)**

0.016

(1.65)* B2C 0.02

(0.10) 0.81

(0.25) 0.44

(2.94)*** -0.77

(-1.97)** 0.34

(0.86) -0.12

(-0.62) -0.484 (-0.43)

B2C × DA_CSP 0.003 (0.60)

0.15 (1.12)

0.003 (0.86)

-0.03 (-3.20)***

-0.09 (-1.05)

0.01 (2.07)**

0.023 (2.49)**

Controls included YES YES YES YES YES YES YES Year FE YES YES YES YES YES YES YES

Observations 2076 2076 2076 2076 2076 2076 2067




Regarding natural versus non-natural affiliation, this chapter does not find that

the sectoral environment of the natural industries influences the relationship between

performance and disclosure characteristics except for optimistic tone of language. As

Panel A of Table 3-9 indicates, firms in the natural industries are likely to use more

optimistic tone of language than their peers in non-natural industries. As Clarkson et

al. (2011), Cho et al. (2010) and Patten (2002) instruct, industrial pressures can be a

key factor affecting the relationship between textual characteristics and performance.

This finding is in line with the expectation that firms in natural industries are subject

to more external pressures to demonstrate sustainability and face more scrutiny of their

sustainability practices, leading them to communicate in a more optimistic way.

Regarding B2C versus other affiliation, this chapter identifies that the sectoral

environment of B2C industries affects optimism, clarity and readability. As indicated

by Panel B of Table 3-9, firms in B2C industries are less likely to use an optimistic

tone of language and are more likely to present information in a clearer manner than

their peers in other sectors. As expected, firms in B2C sectors care more about their

public image and are likely to be more cautious (less use of optimistic tone) and clearer

in their disclosure. Moreover, firms in B2C industries do pay more attention on how

to present sustainability disclosure so that their disclosure is more readable. Thus, the

sectoral environment seems to influence the relationship between disclosure and

performance. As prior studies that analyse linguistic characteristics in disclosure,

including Cho et al. (2010) and Arena et al. (2015), incorporate annual reports only,

Chapter 3 explores whether a separation of annual report and standalone report affects

the findings in following section.

3.5.8 Robustness Test Four – Disclosure Channels

Chapter 3 further examines whether findings about the two hypotheses are

sensitive to various disclosure channels. Arguably, compared to putting sustainability

disclosure in annual reports, releasing standalone reports is a more proactive way of

communicating sustainability practices42. The use of standalone reports demonstrates

that firms that prepare them are more interested in sustainability communication. Thus,

42 A standalone report represents “a very clear engagement by corporations with the increasingly

critical issues of environmental stewardship, social responsibility, and planetary sustainability at a

time when society’s well-being and the planet itself are under unique levels of threat” (Gray &

Herremans, 2011, pp. 2-3).

Chapter 3: Textual Characteristics of Sustainability Disclosure and their Relationship to Sustainability

Performance 103

disclosure medium may affect the relationship between sustainability performance and

textual characteristics. Sample firms are divided into two groups that are determined

by whether they release a standalone report in a year. As presented in Table 3-10,

reporting practices between firms that use standalone reports and firms that do not use

them are very similar, except for three characteristics (i.e. LENGTH, OPTIMISM and

CLARITY). Firms that use standalone reports tend to disclose more comprehensive

information, which is presented in more optimistic terms and communicated in clearer

tones. The findings are consistent with prior literature, including Gray and Herremans

(2011) and Higgins et al. (2015), which highlights that the use of standalone report

demonstrates a proactive attitude towards sustainability communication and/or desire

to improve corporate reputation.


Table 3-10 Disclosure Channels: Standalone Report versus Annual Report This table presents the results of whether use of standalone reports affects relationship between unexpected part of sustainability performance and the seven textual

characteristics of sustainability disclosure, namely the number of words (LENGTH), the amount of quantitative information (NUMBER), the amount of environmental impact information (ENV_IM), optimism (OPTIMISM), certainty (CERTAINTY), clarity (CLARITY) and readability (READ). In the analysis of ENV_IM, the unexpected part of

sustainability performance is replaced by the unexpected part of environmental performance. Variables tabulated below are described in Table 3-2. A dummy variable,

Dummy for Use of Standalone Report, is coded the value of one for the use of a standalone report in a firm-year observation, and the value of zero otherwise.


Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

DA_CSP 0.02

(8.36)***

0.01

(2.17)**

0.01

(1.40)

0.01

(0.69)

0.14

(2.41)**

0.01

(2.08)**

0.023

(2.12)**

Dummy for Use of Standalone Report 0.53

(6.27)***

0.34

(5.06)***

0.20

(2.85)**

0.51

(2.37)**

-0.15

(-0.33)

0.22

(3.14)***

0.723

(1.50)

Dummy for Use of Standalone Report × DA_CSP 0.01

(2.18)**

0.03

(0.92)

0.01

(1.21)

0.02

(1.85)*

0.05

(0.47)

0.01

(1.16)**

-0.011

(-1.21)

Controls included YES YES YES YES YES YES YES

Year FE YES YES YES YES YES YES YES Industry FE YES YES YES YES YES YES YES

Observations 2076 2076 2076 2076 2076 2076 2067




Performance 105

3.5.9 Robustness Test Five – Time Stability

While Australia maintains a voluntary disclosure status in relation to corporate

sustainability during this sample period, it is reasonable to argue disclosure practice

may change over 15 years. As discussed in the introduction, the increased awareness

of corporate sustainability and availability of increased sustainability guidance were

observed during this 15-year period. Therefore, it is possible that findings of the two

hypotheses may change over time. This test selects the first five years (2002 – 2006)

and the last five years (2012 – 2016) to examine time stability. Observations of the

first five years are coded as zero, and ones of the last five years are coded as one. As

Table 3-11 reports, two characteristics of sustainability disclosure change over this

sample period: firms tend to disclose more information about environmental impact

and present their information in clearer terms. I also re-run the main analysis on the

data from 2010 to 2016, which consists of about 80% of both final samples, and the

results remain qualitatively unchanged.


Table 3-11 Time Stability This table presents the results about whether time affects the relationship between the unexpected part of sustainability performance and the seven textual characteristics in

sustainability disclosure, namely the number of words (LENGTH), the amount of quantitative information (NUMBER), the amount of environmental impact information

(ENV_IM), optimism (OPTIMISM), certainty (CERTAINTY), clarity (CLARITY) and readability (READ). In the analysis of ENV_IM, the unexpected part of sustainability

performance is replaced by the unexpected part of environmental performance. Variables tabulated below are described in Table 3-2. The first five years (2002 – 2006) and

the last five years of the sample period (2012 – 2016) are selected to test time stability. A dummy variable (Dummy of Time Periods) is introduced: observations of the first

five years are coded as zero, and observations of the last five years are coded as one.


Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

DA_CSP 0.02

(3.56)***

0.02

(0.15)

0.01

(0.70)

0.01

(0.85)

0.05

(0.48)

-0.01

(-0.56)

0.032

(1.85)*

Dummy of Time Periods 0.99

(6.62)***

0.73

(1.65)

0.33

(2.45)**

-1.21

(-3.63)***

-0.64

(-1.14)

0.29

(2.29)**

1.618

(1.64) Dummy of Time Periods × DA_CSP -0.02

(-0.54)

0.11

(0.72)

0.01

(1.76)*

0.02

(1.44)

0.15

(1.22)

0.01

(2.34)**

-0.030

(-1.60)



Year FE NO NO NO NO NO NO NO

Observations 2076 2076 2076 2076 2076 2076 2067


***Significant at 0.01 level, ** Significant at 0.05 level, * Significant at 0.1 level…………………


Performance 107

3.5.10 Robustness Test Six – Alternative Model Specification

This chapter provides additional assurance that the findings regarding H1 and

H2 are not due to an incomplete Equation (1) by estimating an alternative equation

that includes all public information – the values of each of the variables in Table 3-5

and information on past sustainability performance. I estimate this recursive equation

by including lagged values of the unexpected part of sustainability performance in

Table 3-5 as additional explanatory variables in Equation (1). As Lys et al. (2015)

instruct, I follow this approach, as the information about sustainability performance

that is not contained in the explanatory variables is reflected in lagged values of the

unexpected part of performance. The advantage of the recursive approach is that it

allows one to take into account the relatively sticky nature of corporate sustainability

and unobservable firm characteristics. The updated Equation (1) 43 is presented below.

(4) 𝐶𝑆𝑃𝑖,𝑡 = 𝑏0 + 𝑏1𝑌𝐸𝐴𝑅_𝑅𝐸𝑃𝑂𝑅𝑇𝑖,𝑡 + 𝑏2𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑏3𝑅𝑂𝐴𝑖,𝑡 + 𝑏4𝑀𝑇𝐵𝑖,𝑡 + 𝑏5𝑁𝐸𝑊𝑖,𝑡 +

𝑏6𝐿𝐸𝑉𝑖,𝑡 + 𝑏7𝐶𝐴𝑃𝐸𝑋𝑃𝑖,𝑡 + 𝑏8𝐶𝐺𝑖,𝑡 + 𝑏9𝑆𝐻𝐴𝑅𝐸𝐶𝑂𝑁𝑖,𝑡 + 𝑏10𝐶𝑆𝑅_𝐶𝑖,𝑡 + 𝑏11𝑅𝑀𝐶𝑖,𝑡 +

𝑏12𝐷𝐴_𝐶𝑆𝑃𝑖,𝑡−1 + 𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡

As Table 3-12 shows, the coefficient of the one-year lagged unexpected part of

sustainability performance is highly significant and equal to 3.328. The explanatory

power of the recursive equation is substantially higher than the Equation (1) in Table

3-12 with a R-squared of 89% versus 62% in Table 3-5. I re-run Equation (2) and (3)

using the unexpected part of performance determined using Equation (4). As Table 3-

12 presents, the findings regarding H1 and H2 remain qualitatively unchanged.

43 The lagged values of the unexpected part of sustainability performance (DA_CSP) are incorporated

into the Equation (4).


Table 3-12 Alternative Model Specification This table presents the results from alternative model specification. This alternative specification includes the lagged values of the unexpected part of sustainability

performance in Table 3-5 as additional explanatory variables in Equation (1). Seven textual characteristics in sustainability disclosure, namely number of words (LENGTH),

amount of quantitative information (NUMBER), amount of environmental impact information (ENV_IM), optimism (OPTIMISM), certainty (CERTAINTY), clarity

(CLARITY) and readability (READ) are included. In the analysis of ENV_IM, the unexpected part of sustainability performance is replaced by the unexpected part of

environmental performance. Variables tabulated below are described in Table 3-2.

Panel A Equation (4)

CSP

Coeff.

(t-stat)

One-year Lagged DA_CSP 3.328

(4.24)***

Other Variables of Equation (1) Included YES

Year FE YES Industry FE YES

Observations 2076


Panel B Equation (2) and (3) including the Unexpected Part of Sustainability Performance Estimated by Using Equation (4)


Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

DA_CSP 0.01

(2.67)***

0.68

(2.31)**

0.01

(2.87)***

0.01

(1.96)*

0.02

(3.52)***

0.04

(1.90)*

0.021

(3.28)***




Observations 2076 2076 2076 2076 2076 2076 2067 Adjusted R-square 0.46 0.09 0.09 0.01 0.15 0.12 0.08



Performance 109

3.5.11 Robustness Test Seven – Inclusion of Firms’ Experience of Sustainability

Disclosure as a Control

This chapter provides additional assurance that the findings of H1 and H2 are

not caused by excluding the experience of sustainability disclosure (YEAR_REPORT)

as a control. I re-estimate Equation (1) and (2) to include the experience of

sustainability disclosure (YEAR_REPORT) as a control. As Table 3-13 shows, the

findings of H1 and H2 remain qualitatively unchanged.44

44 I appreciate this suggestion from the thesis examiner.


Table 3-13 Inclusion of Firms’ Experience of Sustainability Disclosure as a Control This table presents the results from including firms’ experience of sustainability disclosure (YEAR_REPORT) as a control. Seven textual characteristics in sustainability

disclosure, namely number of words (LENGTH), amount of quantitative information (NUMBER), amount of environmental impact information (ENV_IM), optimism

(OPTIMISM), certainty (CERTAINTY), clarity (CLARITY) and readability (READ) are included. In the analysis of ENV_IM, the unexpected part of sustainability

performance is replaced by the unexpected part of environmental performance. Variables tabulated below are described in Table 3-2.


Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

DA_CSP 0.02

(11.23)***

0.24

(5.38)***

0.01

(3.93)***

0.01

(2.30)**

0.02

(4.41)***

0.01

(4.11)***

0.02

(3.15)***

YEAR_REPORT 0.12

(4.84)***

0.83

(1.77)

0.07

(3.50)***

0.08

(0.35)

0.01

(1.77)*

0.04

(1.58)

-0.07

(-1.27)

Constant and other Controls Included YES YES YES YES YES YES YES

Year FE YES YES YES YES YES YES YES Industry FE YES YES YES YES YES YES YES

Observations 2076 2076 2076 2076 2076 2076 2067




Performance 111

3.6 DISCUSSION AND CONCLUSION

Chapter 3 addresses the research question one: whether and how is an Australian

firm’s sustainability performance associated with its sustainability disclosure? It does

this by analysing the relationship between firms’ sustainability performance and

sustainability disclosure. Seven textual characteristics regarding sustainability

disclosure, amount of disclosure, amount of quantitative information in disclosure,

amount of information in relation to environmental impact, tone of optimism in

disclosure, tone of certainty in disclosure, tone of clarity in disclosure, and readability

of disclosure, are used as variables of interest.

The first hypothesis posits that there is no relationship between the first six

textual characteristics and performance, and the second hypothesis posits a positive

relationship between readability and performance. Analysing an unbalanced panel set

of data, the results reveal that better performing firms prepare more comprehensive

disclosure, environmental-impact information and quantitative information; they also

communicate in an optimistic, certain, clear and more readable way. The findings are

consistent with Herbohn et al. (2014) who sampled data from 2006 and examined the

environmental dimension of sustainability and Lanis and Richardson (2012b) who

found a positive relationship between sustainability performance and sustainability

disclosure (albeit both studies used a narrow scope of sustainability performance).

These findings do not necessarily contradict Clarkson, Overell et al. (2011),

Mitchell et al. (2006) and Deegan and Rankin (1996), who identified a negative

relationship between disclosure content and performance in Australia. First, samples

analysed in this study are different from those examined by prior literature. Secondly,

measuring sustainability performance using different methods may be another reason

for the inconsistent findings. These findings also do not necessarily contradict the US

studies which examine tone of language in disclosure. Although Cho et al. (2010) and

Arena et al. (2015) find a negative relationship between optimism of disclosure and

performance, the inconsistencies may be attributed to sample selection. Future studies

are encouraged to explore reasons behind the conflicting findings.

Extending prior literature, including Higgins et al. (2015), Eccles et al. (2014)

and Cho and Patten (2007), various robustness tests are performed. Granger causality

tests were used to test the signalling effects of textual characteristics on performance


in different periods, and these tests do not report any signalling effect. Sectoral analysis

was also performed and revealed that firms in the natural industries tend to use a more

optimistic tone, and firms in the B2C industries communicate in a more cautious,

readable and clear way. At a comparable level of sustainability performance, firms that

release standalone reports present in a more optimistic and clear way and disclose more

comprehensive information. Firms are found to increasingly disclose information

about environmental impact and present sustainability disclosure in a clearer way over

the 15 years’ sample period. An alternative measurement of sustainability performance

was used to check whether the findings are sensitive to other measurements, and an

alternative model was used to mitigate the endogeneity concern. Findings are robust

to this alternative performance measurement and alternative model specification.

From the theoretical perspective, there are two theories relevant to my research

question. Institutional theory assumes that sustainability disclosure is used to mitigate

pressures due to institutions with regard to corporate sustainability. Signalling theory

posits that sustainability disclosure is used to signal firms’ sustainability performance.

The findings substantiate signalling theory in that firms use sustainability disclosure

to distinguish themselves in their sustainability performance. As this chapter’s findings

align with Wang et al. (2018) and identify a positive relationship between readability

and performance in the US, the incomplete revelation hypothesis (Bloomfield, 2002,

2008) is also supported by these results. In terms of contribution to literature, Chapter

3 provides more insights to sustainability communication by using linguistic analytical

techniques (Tregidga et al., 2012).

Following prior literature, including Wang et al. (2018), Bagnoli et al. (2016),

Arena et al. (2015) and Cho et al. (2010), which examine disclosure from linguistic

perspectives, this chapter provides additional empirical evidence about the relationship

between how firms present and perform sustainability. This chapter also extends the

scope of linguistic analysis from financial and accounting disclosure to sustainability

disclosure. Chapter 3 generates practical implications. It is reasonable to suggest that

disclosure users are expected to better understand sustainability disclosure and easily

extract useful information from the disclosure by good performers (their sustainability

disclosures are more readable), and the disclosure released by bad performers seems

to be harder to digest (their sustainability disclosures are less readable). Disclosure by

bad performers may be not sufficiently comprehended by users, potentially leading to


Performance 113

biased decisions made by disclosure users. Aligning with Loughran and McDonald

(2014a, 2014b, 2016), this chapter encourages some regulatory guidance of disclosure

readability and assurers’ attention towards sustainability disclosure readability.

This chapter has four main limitations. First, findings in the Australian context

are generalizable to the extent of consistency of regulatory framework. Future studies

are encouraged to investigate this relationship in countries where the socio-political

environment of sustainability practice is different from that in Australia. For example,

future studies may investigate whether mandatory sustainability disclosure introduced

in some countries influences the relationship between what are disclosed and what are

performed. Secondly, this chapter measures textual characteristics in word-frequency

way. Following Loughran and McDonald (2016), I also encourage future research to

explore other ways (e.g. machine learning) to measure them. Thirdly, Chapter 3 does

not consider the effects of textual characteristics on disclosure users. Although this is

not within the scope of this thesis, future research may understand how disclosure users

react to textual characteristics concerned. For example, doing experiments with users

of sustainability disclosure can shed light on how textual characteristics of disclosure

affect their perceptions to firms’ sustainability performance. Last, this chapter reveals

that sustainability disclosure does not hide poor performance, yet it is uncertain

whether firms boast their performance in sustainability disclosure at a level that

misleads users of disclosure. In this context, boast refers to firms overly positively

present their sustainability performance. Again, future studies are encouraged to use

experimental design to explore this concern.

Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability

Performance 115

Chapter 4: The Sustainability Committee,

Experience of Sustainability Disclosure and

Sustainability Performance

4.1 INTRODUCTION

As Chapter 1 illustrates, corporate sustainability includes economic prosperity,

social equity, and environmental integrity (Bansal, 2005). Prior literature emphasises

environmental and social impact due to firms’ operational activities (Dahlsrud, 2008).

Corporate sustainability has been endorsed by a number of international organizations,

including the United Nations. Australia has adopted global commitments. For instance,

a formal network for Australian signatories to the UN Global Compact, an initiative

that promotes corporate sustainability, was launched in 2009. Additionally, corporate

sustainability also has been undertaken by more Australian firms. For example, the

global surveys of KPMG (2013, 2015, 2017) and a series of surveys conducted by

Australian Council of Superannuation Investors (2012, 2013, 2014, 2015, 2016, 2017)

reveal that more Australian firms are engaging in corporate sustainability. A

meaningful question arises that how the sustainability performance of Australian firms

would be improved.

Several avenues of improvement are currently used by firms. For instance, a C-

suite officer (i.e. chief sustainability officer) (Miller & Serafeim, 2015) and a board

committee devoted to sustainability (a corporate social responsibility or sustainability

committee) are governance mechanisms used by firms looking to strengthen corporate

sustainability. In the literature, the board committee devoted to sustainability has been

researched by only few studies. For example, Rodrigue et al. (2013) find that existence

of the board committee is irrelevant to environmental performance, yet Dixon-Fowler

et al. (2017) report a positive relationship between existence of the board committee

and firms’ environmental performance. Thus, as an advisory to the board of directors

and senior management regarding sustainability issues (Peters & Romi, 2014, 2015),

116 Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance

the sustainability committee45 and its influence on sustainability performance needs

more efforts to research. For Australian firms, sustainability committee is a voluntary

governance choice. There are few Australian studies about various characteristics of

sustainability committee and how the committee characteristics are related to corporate

sustainability. The committee has a very long history in Australia. For example, CSR

Limited formed such a committee in 1994. Chapter 4 defines the sustainability

committee from a broader aspect – sustainability committees are expected to explicitly

focus on (at least some if not all) sustainability issues in their agenda. Thus, it is

reasonable to argue that Australia provides a good research opportunity to examine the

effects of a sustainability committee, as such a committee has a long history in this

country.

As the previous chapter explains, more Australian firms consider disclosure, and

more disclosure is being released. This chapter explores how the firms’ experience of

sustainability disclosure is related to their sustainability performance. On one hand,

better transparency of corporate sustainability (sustainability disclosure) is perceived

to improve sustainability performance (Jin & Leslie, 2003, 2009), as the Brandeis’s

view suggests: “sunlight is said to be the best of disinfectants”.46 On the other hand,

as revealed by some studies about sustainability disclosure (Boxenbaum & Jonsson,

2008; Brennan et al., 2009; Deegan, 2002; Delmas & Toffel, 2011; Oliver, 1988, 1991,

1997), the disclosure could be decoupled from actual performance. If this is the case,

firms’ experience of sustainability disclosure is expected to not help them to improve

their sustainability performance. Interviewing business leaders, Adams (2017) found

that the experience of sustainability disclosure can help boards of directors to take into

account sustainability issues. Apparently, more empirical evidence can contribute to

this discussion. As sustainability disclosure is embraced by more Australian firms, this

chapter also would like to join this discussion by empirically examining this relation.

Motivated by the visibly increasing importance of corporate sustainability, this

chapter examines how the sustainability committee and firms’ disclosure experience

45 There are different names for this committee in annual reports, including “public policy committee,

sustainability committee, corporate social responsibility committee, environmental health and safety

committee, etc.” (Peters & Romi, 2015, p. 173). 46 Quotes are made by Louis Brandeis in his book, Other People's Money and How the Bankers Use

It, which is firstly published in 1914.


Performance 117

are related to performance. Accordingly, two research questions are proposed (readers

may refer to Section 1.3.2 and Table 1-1):

RQ2: How is experience of sustainability disclosure related to sustainability

performance?

The firm’s experience of sustainability disclosure is operationalized by how

many years a firm has disclosed its corporate sustainability.

RQ3: How is the sustainability committee related to sustainability

performance? This is operationalized as:



b. How is the effectiveness of the sustainability committee related to


There are a number of studies about audit committee effectiveness that inspired

me regarding how to operationalize sustainability committee effectiveness.47 Chapter

4 included up to twelve committee characteristics that comprise four components of

sustainability committee effectiveness: (1) composition, (2) authority, (3) resources,

and (4) diligence. Unlike Zaman, Hudaib and Haniffa (2011) and Al‐Shaer and Zaman

(2018), I do not include committee size as an indicator of committee effectiveness, as

every committee characteristic is scaled by committee size in this chapter. In alignment

with DeZoort et al. (2002) who review studies about audit committee effectiveness, I

define an effective sustainability committee as one that consists of competent members

with the authority and resources to facilitate decisions made by the board and senior

management regarding corporate sustainability through diligent efforts and advice.

Analysing 2,166 firm-year observations from 2002 to 2016, this chapter reveals

a positive relationship between the firm’s experience of sustainability disclosure and

performance. In terms of the presence of a sustainability committee, Chapter 4 finds

that there is a positive relationship between the presence of a sustainability committee

and sustainability performance. Sampling 430 firm-year observations as to committee

47 Readers may refer to Turley and Zaman (2007), Zaman, Hudaib and Haniffa (2011), Aldamen,

Duncan, Kelly, Mcnamara and Nagel (2012), Bryce, Ali and Mather (2015), Sultana (2015),

Appuhami and Tashakor (2017), Al‐Shaer and Zaman (2018), Endrawes, Feng, Lu and Shan (2018),

and Shan, Troshani and Tarca (2019).


effectiveness, Chapter 4 finds a positive relationship between committee effectiveness

and a pillar of sustainability performance, namely environmental performance. Among

the four components of committee effectiveness, resources and authority are found to

exert influence on environmental performance. I performed robustness tests, including

endogeneity, performance measurements, sectoral environment and time stability.

This chapter explores two avenues for voluntary practices perceived to improve

sustainability performance: (1) firm’s experience of sustainability disclosure; and (2)

the presence and effectiveness of a sustainability committee. Extending Adams (2017),

Chapter 4 renders empirical evidence based on a set of panel data to suggest that firms

can benefit from engaging in sustainability disclosure by having better sustainability

performance. Distinct from prior studies48 about the committee, Chapter 4 emphasizes

sustainability performance, rather than other sustainability practices (e.g. assurance

services or disclosure). Moreover, firms in various sectors are sampled over 15 years

(2002 – 2016), rather than few sectors in a short period. Arguably, the research design

of Chapter 4 depicts a more comprehensive picture than previous studies, contributing

to the literature focusing on sustainability and corporate governance. In addition, rich

characteristics of sustainability committee (e.g., composition, authority, resources, and

diligence), are examined, rather than being limited to only the presence of committee.

The practical implications of this chapter are also worthy of discussion.

From a managerial perspective, as the awareness of sustainability is expected to

continue to rise and require further integrated decision-making (Carroll, 1991; Carroll

& Shabana, 2010; Schwartz & Carroll, 2003), voluntary disclosure and the presence

of a sustainability committee provide opportunities for firms to embrace this social

trend. Thus, this chapter directly appeals to boards who plan to introduce sustainability

into the firms that they serve by suggesting active engagement in disclosure and the

setup of a committee as two feasible methods of integration.

From the regulators’ perspective, Chapter 4 highlights voluntary practices that

strengthen sustainability performance. Under a pressure to follow regional trends, the

ASX may recommend the two avenues to its listed firms. Compared with mandatory

approaches (refer to Section 1.2), engagement in sustainability disclosure and setup of

48 See Peters and Romi (2014, 2015) as examples.


Performance 119

sustainability committee provide more discretion to Australian firms in deciding how

to pursue corporate sustainability.

From investors’ perspective, as socially responsible investments in Australia saw

a rise (refer to Section 1.2), Chapter 4 investigates two avenues that can contribute to

better sustainability performance. Thus, investors interested in social responsibility or

sustainability may discuss the two avenues with directors and top management team.

From the broader perspective, Chapter 4 also aligns with Bowen (2014) who

highlights that symbolic action also has social costs, as resources used on symbolic

action could be switched to substantial action. As both the preparation of sustainability

disclosure information and establishing a sustainability committee are likely to have

costs to firms and to stakeholders, respectively, they are substantial actions that

generate benefits to the society. The remainder of Chapter 4 unfolds as follows: prior

studies are discussed in Section 4.2, and hypotheses are developed in Section 4.3. The

research design is explained in Section 4.4. Findings are presented in Section 4.5. This

chapter is concluded in Section 4.6.

4.2 LITERATURE REVIEW

In the Australian literature, interviewing business leaders in Australia and South

Africa, Adams (2017) found that sustainability reporting initiatives (i.e. the King III

Code and International Integrated Reporting Framework) help boards of directors

focus on issues regarding sustainability. Extending Adams (2017), Chapter 4 provides

quantitative evidence about the relationship between firms’ experience of disclosure

and performance. There are no studies directly relevant to RQ2, however some prior

research assists deriving it. Analysing environmental impact assessment, Hironaka and

Schofer (2002) suggest that use of environmental impact assessment in firms gradually

raised their awareness of environmental impact, and Chandler (2014), examining the

role of ethics and compliance officer position, find that although this officer position

was empty and symbolic at beginning, it gradually pushes senior management to pay

more attention to ethics as well as compliance issues over time. In sociology literature,

Edelman (1992) and Dobbin, Schrage, and Kalev (2009), analysing equal employment

opportunity/affirmative action practices in the US, confirm that an empty exercise or

a symbolic mechanism within a firm can transform into substantial practice over time.


RQ2 aligns with the previous studies by examining firms’ experience of sustainability

disclosure and their sustainability performance.

While the establishment of a sustainability committee is not a new phenomenon

in Australia, many research opportunities remain. In prior studies, Rankin et al. (2011)

examined how the sustainability committee is related to the disclosure of greenhouse

gas emissions and found that its existence is irrelevant to how Australian firms report

their greenhouse gas emissions. Prior literature in other countries approaches the

sustainability committee from different perspectives.

Sampling 219 firm-year observations between 2003 and 2008, Rodrigue et al.

(2013) examined three governance mechanisms as to environmental performance, one

of which was the sustainability committee. There is no significant relationship between

the three governance mechanisms and environmental performance. Analysing a group

of the US firms in 2004, Dixon-Fowler et al. (2017) identified that the presence of a

sustainability committee and a C-suite officer devoted to firms’ environmental issues

are positively related to environmental performance. Thus, the current literature seems

to be contradictory regarding how a sustainability committee relates to environmental

performance.

Moreover, few studies examine how the presence of a sustainability committee

is related to sustainability disclosure. Analysing US firms (2002 – 2010), Peters and

Romi (2015) examine corporate governance characteristics pertains to sustainability,

namely presence of a sustainability committee, the presence of C-suite officer devoted

to sustainability matters, the personal characteristics of committee members and the

personal expertise of this officer. According to a sample of 912 firm-year observations,

they found the presence of a sustainability C-suite officer and the personal expertise

of this C-suite officer are positively related to use of assurance services on disclosure.

While the presence of a sustainability committee is arguably not directly related, the

committee members’ personal characteristics do influence acquisition of assurance

services. A committee that consists of directors with sustainability expertise is likely

to employ assurance services provided by professional accounting firms.

Regarding how firms communicate greenhouse gas emissions, Peters and Romi

(2014), examining 1,238 firm-year observations in the US between 2002 and 2006,

find that the presence of a sustainability committee and of a C-suite officer devoted to

sustainability issues are positively related to disclosure of greenhouse gas emissions.


Performance 121

Expertise of committee members and the person performing as C-suite officer affect

disclosure quality. Liao et al. (2015), analysing 329 firms in the UK from 2011, find

that presence of a sustainability committee influences whether firms participate in the

Carbon Disclosure Project, and other board characteristics (i.e. gender diversity and

board independence) affect the participation. Analysing 114 firms from ten countries

in 2003, Michelon and Parbonetti (2012) find governance characteristics, namely

board independence, CEO duality, presence of a sustainability C-suite officer and the

presence of a sustainability committee are not related to sustainability disclosure

(measured as number of sentences).

Chapter 4 contributes to this emerging field in multiple ways. First, this chapter

concentrates on the sustainability committee in Australia – an area that prior studies

do not explore. Secondly, it examines how the presence of a sustainability committee

relates to sustainability performance, a topic that is meaningful and practical. Thirdly,

extending on prior literature, Chapter 4 uses a more robust research design that is built

on a longer sample period, inclusion of more committee characteristics, inclusion of

firms in different industries and the use of different performance measurements. The

theoretical framework and hypotheses of this chapter are detailed in following section.

4.3 THEORETICAL FRAMEWORK AND HYPOTHESIS

This chapter develops three hypotheses, the first regarding disclosure experience

(H3), the second regarding the presence of a sustainability committee (H4a), and the

third regarding the sustainability committee effectiveness (H4b). Readers may refer to

Section 1.3.2 and Table 1-1 for the aforementioned three hypotheses. Development of

H3 is based on institutional theory.49 The underlying theoretical tenets of institutional

theory have been carefully discussed at Section 3.3. Participation in sustainability

disclosure tends to strengthen performance over time, even if disclosure was only an

empty exercise at the beginning (Scott, 2001). Tracking how EEO/AA50 mechanisms

function over time, Edelman (1992, p. 1544) finds “once EEO/AA structures are in

place, the personnel who work with or in those structures become prominent actors in

the compliance process: they give meaning to law as they construct definitions of

49 More information about institutional theory can found in Meyer (1992), Scott (2001) and

Boxenbaum and Jonsson (2008). 50 EEO/AA is abbreviation of equal employment opportunity/affirmative action in Edelman (1992).


compliance within their organizations”. Aligning with Edelman (1992), few studies,

including Hironaka and Schofer (2002), Dobbin, Schrage, and Kalev (2009), Tilcsik

(2010) and Chandler (2014), find that an empty exercise or a symbolic mechanism

within an organization can transform into substantial practice over time, as such an

exercise or mechanism educates persons within an organization and eventually alters

organizational behaviour from the inside out. Following prior literature, this chapter

conjectures that firms that have engaged in sustainability disclosure for longer duration

would deliver better performance, as experience of disclosure is to raise awareness of

sustainability practice within firms and equip decision makers with the knowledge

about how to practice sustainability, leading to better performance. Thus, H3 is

presented below:

H3 There is a positive relationship between a firm’s sustainability performance

and its experience of sustainability disclosure.

Regarding the H4a – how the presence of a sustainability committee is related to

sustainability performance, there are two theoretical arguments, namely greenwashing

and stewardship theory, which can be used to develop the H4a. In stewardship theory,

“pro-organizational, collectivistic behaviours have higher utility than individualistic,

self-serving behaviours” for steward (Davis, Schoorman & Donaldson, 1997, p. 24).

Such utility order can be due to a number of psychological and situational factors. For

example, to protect their reputations and future career opportunities, senior managers

and directors would operate their firms in a manner that maximizes firm value (Daily,

Dalton, & Cannella, 2003). In addition to the concern on personal reputation, there are

other factors, including identification (whether senior managers and directors identify

with their own firms), commitment (to what extent they are committed to their firms),

management philosophy, and cultural differences (Davis, Schoorman & Donaldson,

1997). Thus, stewardship theory (Daily, Dalton, & Cannella, 2003; Kiel & Nicholson,

2003; Nicholson & Kiel, 2007) posits that board committees are formed to facilitate

directors and management in monitoring and strategic decision-making (Hillman &

Dalziel, 2003), and directors provide good stewardship of the resources entrusted to

them (Kiel & Nicholson, 2003; Nicholson & Kiel, 2007). In the literature, Walls et al.

(2012), Peters and Romi (2014, 2015) and Dixon-Fowler et al. (2017) lend support to


Performance 123

stewardship theory by finding that sustainability committees can help boards to better

integrate sustainability with corporate governance.

From a view of greenwashing, sustainability committees represent “ceremonial

façade or artificial or false front that in the case of formal organizations is fashioned

to create a favourable impression” (Forbes & Jermier, 2011, p. 562). From the view of

sustainability disclosure, greenwashing is defined as an intersection of two activities,

(1) worse sustainability performance and (2) positive disclosure about sustainability

performance (Delmas & Burbano, 2011). It has been frequently used in the context of

sustainability disclosure, as Bowen (2014) elaborates that greenwashing designates to

a strategic information-disclosure decision initiated by firms to benefit firms yet cost

society. However, greenwashing can be used in a context of corporate governance for

sustainability (sustainability committees in this chapter), as Forbes and Jermier (2011,

p. 562) suggest that “greenwashing is a sophisticated form of symbolic management

…… greenwashing is a green ceremonial façade”. Nevertheless, greenwashing in the

context of corporate governance for sustainability relates to other theoretical aspects,

including compromise of institutional theory (Oliver, 1988, 1991, 1997), impression

management (Bansal & Clelland, 2004; Cho, Patten, & Roberts, 2014; Tata & Prasad,

2015), and decoupling (Boxenbaum & Jonsson, 2008). To make my thesis concise and

clear, I emphasize this theoretical argument, greenwashing in the context of corporate

governance for sustainability. In their studies, Forbes and Jermier (2011) and Rodrigue

et al. (2013) suggest that as a greenwashing mechanism, a sustainability committee is

formed to maintain legitimacy and improve reputation. The greenwashing argument

suggests that there is no relation between firms’ sustainability committee and their

sustainability performance. A non-directional hypothesis is proposed for the second

hypothesis:

H4a There is no relationship between the presence of a sustainability committee

and sustainability performance.

Regarding the H4b – how sustainability committee effectiveness is related to

sustainability performance, Chapter 4 finds its theoretical foundation in DeZoort et al.

(2002) who emphasize audit committee effectiveness and resource dependency theory


(Pfeffer & Salancik, 2003). The sustainability committee is deemed as a nexus between

a firm and its essential resources needed to improve sustainability performance (Kiel

& Nicholson, 2003; Nicholson & Kiel, 2007). In resource dependency theory, board

of directors and their committees are considered as providers of various resources to

firms. Arguably, they provide legitimacy to maintain the public image of firms,

expertise needed (expertise of corporate sustainability in my case), administering

advice, linking firms to stakeholders (including investors, creditors, labour union and

politicians), as well as aiding in important decision making processes (Hillman &

Dalziel, 2003). In order to function as providers of sustainability-related resources to

firms, sustainability committees need to be effective. The operationalization of

sustainability committee effectiveness considers the characteristics of those who

comprise the committee and how they are organized.

First, competent members are expected to exert positive influence on corporate

sustainability. In Australia, prior studies explore several director characteristics. For

instance, Gray and Nowland (2013) analyse qualifications and professional expertise,

Gray, Harymawan, and Nowland (2016) examine the directors’ political connection,

Bugeja, Fohn, and Matolcsy (2016) consider directors’ external board connection and

work experience, and Chapple, Gray, Nowland and Sadiq (2018), Gray and Nowland

(2018) and Nowland and Simon (2018) include the directors’ meeting attendance in

their analysis. These studies provided the foundation of the research design of this

chapter. Secondly, how committee members are organized together matters. Following

DeZoort et al. (2002), Krishnamoorthy, Wright, and Cohen (2002), Ng and Tan (2003)

and Rochmah Ika and Mohd Ghazali (2012) also argued that committee effectiveness

is about more than the committee members’ personal characteristics. It consists of four

components in Chapter 4, namely (1) composition, (2) authority, (3) resources and (4)

diligence. Thus, the four components (composition, resources, authority, and

diligence) also correspond to human capital and relational capital considered by

resource dependency theory. In resource dependency theory, the first term, human

capital, refers to expertise, experience, knowledge, and skills of those who sit on

sustainability committees; the second term, relational capital, refers to actual and

potential resources embedded within the social networks maintained by the members

of committees (Hillman & Dalziel, 2003).


Performance 125

Resource dependency theory reinforces the above discussion about committee

effectiveness. Based on this theory, I argue that directors’ characteristics decide how

directors exercise their power in relation to sustainability issues and how sustainability

committees on which they sit perform. Effective sustainability committees can provide

quality advice and counsel about sustainability, help firms to maintain legitimacy and

reputation of corporate sustainability, better work as channels of communication and

conduits of information between firms and stakeholders, as well as acquiring resources

from important elements outside firms. Thus, the H4b about the relationship between

sustainability committee effectiveness and sustainability performance is proposed:

H4b There is a positive relationship between sustainability committee

effectiveness and sustainability performance.

4.4 RESEARCH DESIGN

The sample period is from 2002 to 2016. Data about sustainability performance

were downloaded from the Thomson Reuters Asset4. Data in relation to experience of

sustainability disclosure were collected from firms’ reports and the Thomson Reuters

Asset4. Data about sustainability committees were collected from the Bloomberg, the

Thomson Reuters Asset4 and annual reports. Other data were directly downloaded

from Morningstar and Worldscope. Firms that are constituents of the ASX 20051 are

sampled in this chapter.

After synthesizing data and deleting missing data, there are two samples, the first

sample comprises 2,166 firm-year observations for H3 and for H4a, and the second

sample comprises 430 firm-year observations for H4b. As Beck et al. (2018) suggest,

the Global Industry Classification Standard is adopted to classify the sample firms.

Samples are comparable with those analysed in Nguyen et al. (2018) who also use the

Thomson Reuters Asset4.

Panel A of Table 4-1 presents the industrial distribution of the first sample, and

Panel B of Table 4-1 reports year distribution of the first sample. Panel C reports

51 ASX 200 represents about 82% of the market capitalization on the ASX. More details about ASX

200 can be found at https://au.spindices.com/indices/equity/sp-asx-200, and access date is 13 May

2019.


industrial distribution of the second sample, and year distribution of the second sample

is in Panel D. Panel E reports the sample reduction process. As Table 4-1 shows, there

are two interesting patterns of frequency as to sustainability committees in Australia:

(1) greater than a half of sample committees (58.26%) are formed by firms in three

industries, namely materials, energy and industrials; (2) the majority of committees in

sample (82.37%) are formed after 2008. In terms of the sample industry distribution,

the materials, energy, and industrials industries are expected to have more issues about

corporate sustainability (Cho & Patten, 2007; Eccles et al., 2014), and firms in these

industries are expected to be more interested in improving their sustainability

performance with various methods, including sustainability committee. I further

examine this in Section 4.5.7. Regarding the sample year distribution, after searching

news, legislations, and prior studies, I do not identify persuasive shock about

sustainability committee choice. I examine whether sample periods affect findings in

Section 4.5.8. Variables and the measurements are explained below.

Table 4-1 Sample Selection Regarding the first sample, Panel A presents the distribution by industry, and Panel B reports the

distribution by year. Regarding the second sample, Panel C presents the distribution by industry, and

Panel D reports the distribution by year. Panel E reports the sample reduction process.

Panel A Distribution of the First Sample Firms by Industry


Materials 519 23.96


Financials 277 12.79 Energy 297 13.71



Health Care 108 4.99

Utilities 47 2.17

Information Technology 38 1.75

Telecommunication Services 36 1.66

Total 2166 100

Panel B Distribution of the First Sample Firms by Year

Year N Percent

2002 6 0.28

2003 9 0.42

2004 60 2.77 2005 69 3.19

2006 72 3.32

2007 78 3.60

2008 88 4.02

2009 175 8.08

2010 247 11.40

2011 254 11.73

2012 257 11.87

2013 240 11.08

2014 214 9.88


Performance 127

2015 206 9.51

2016 191 8.82

Total 2166 100

Panel C Distribution of the Second Sample Firms by Industry


Materials 180 41.86


Energy 78 18.14

Financials 31 7.21



Health Care 5 1.16 Utilities 5 1.16

Information Technology 0 0

Telecommunication Services 0 0

Total 430 100

Panel D Distribution of the Second Sample Firms by Year

Year N Percent

2002 2 0.47

2003 5 1.16

2004 11 2.56

2005 14 3.26

2006 17 3.95

2007 24 5.58

2008 25 5.81 2009 35 8.14

2010 38 8.84

2011 43 10.00

2012 49 11.40

2013 49 11.40

2014 40 9.30

2015 41 9.53

2016 37 8.60

Total 430 100

Panel E Sample Reduction Process

Observations

Observations available in Thomson Reuters Asset4 (2002 – 2016) 2,639

LESS: missing data due to merging with Worldscope (151)

LESS: missing data due to merging with Morningstar (322) Firm-year observations for H3 and H4a 2,166

LESS: exclusion of sample firms without a sustainability committee (1,736)

Firm-year observations for H4b 430

4.4.1 Corporate Sustainability Performance (CSP)

As suggested by Malik (2015) and Dragomir (2018), there are different ways to

operationalize sustainability performance. For instance, Galbreath and Shum (2012)

measure sustainability performance firm by firm by hiring experts’ opinion, and Lee,

Faff, and Langfield-Smith (2009), Humphrey, Lee, and Shen (2012) and Beck et al.

(2018) adopt ESG ratings from (rating) agencies to operationalize such performance.

As instructed by various seminal studies, including Ioannou and Serafeim (2010),

Cheng et al. (2014), Eccles, Ioannou, and Serafeim (2014), Lys et al. (2015), Michelon,

Pilonato, and Ricceri (2015) and Liang and Renneboog (2017), this chapter measures


sustainability performance according to the ESG ratings assigned by the Thomson

Reuters Asset452 (i.e. Asset4). Asset4 has a multilevel structure in its assessment: at

the first level, there are more than 750 data points for firms in its universe; at the middle

level, these data points are synthesized into more than 250 performance indicators; and

at the very top level, performance indicators are synthesized into categories that are

composed of four pillars: namely (1) environmental score/ performance, (2) social

score/ performance, (3) corporate governance score/ performance and (4) economic

score/ performance. In the Australian literature, Asset4 Asset4 ESG ratings has been

used by Biswas et al. (2018), Nguyen et al. (2018) and Krishnamurti, Shams, and

Velayutham (2018) to operationalize Australian firms’ sustainability performance.

While I acknowledge that the Asset4 considers firms’ disclosure in measuring

how firms perform regarding sustainability performance, it includes other sources,

including news, stock exchange filings and NGOs’ information. Following the studies

of Ioannou and Serafeim (2010), Cheng et al. (2014), Eccles et al. (2014) and Nguyen

et al. (2018) that also use the ESG ratings/ scores of Asset4 to measure sustainability

performance, I measure firms’ sustainability performance by averaging environmental

score/performance and social score/performance (i.e. the mean of the first two pillars).

It is noteworthy that the third pillar, corporate governance performance/ score, is also

included as control. Regarding sub-categories, environmental performance/ score

consists of three sub-categories: (1) emission reduction, (2) product innovation, and

(3) resource reduction; social performance/ score has six sub-categories: (1) product

responsibility, (2) diversity and opportunity, (3) health and safety, (4) community, (5)

training and development, and (6) employment quality; and, corporate governance

performance/ score has five sub-categories: (1) board functions, (2) board structure,

(3) compensation policy, (4) vision and strategy, and (5) shareholder rights. Although

I do not use economic performance/ score in Chapter 3, I still introduce sub-categories

of economic performance/ score for a comprehensiveness purpose: (1) performance,

(2) shareholder loyalty, and (3) client loyalty. The earliest available data is from 2002,

and the latest data ceases in 2016. Readers may refer to Figure 3-1 and 3-2.

52 More information about the Thomson Reuters Asset4 can be found on

https://libguides.mit.edu/sustainablebusiness/asset4 and https://www.sri-

connect.com/index.php?option=com_comprofiler&Itemid=4&task=userProfile&user=1007283, and

access date is 24 January 2019.


Performance 129

4.4.2 Corporate Sustainability Committee: Presence (SC) and Effectiveness

(SC_EFFE)

Regarding the presence of a sustainability committee(s) (SC), this chapter codes

the value of one for a firm-year observation if there is sustainability committee, and

zero otherwise. Synthesizing data from several sources, namely the Bloomberg, Asset4

and annual reports (collected from the Connect 4 and corporate websites), I found 430

firm-year observations of a sustainability committee. An example of a sustainability

committee is presented in the Appendix E.

Sustainability committees in the sample are standalone, rather than combined

with other committees. While sustainability committees theoretically can be combined

with other committees53, Australian firms seem to prefer a standalone committee. It is

interesting to note that some Australian firms established more than one sustainability

committee. For example, Crown Resorts Limited formed a committee on responsible

gaming and another on occupational health, safety and environment in 2011; the firm,

maintaining the two committees, formed the third committee focusing on corporate

social responsibility in 2014. In the samples, there are three firm-year observations of

three committees and 24 firm-year observations with two committees.

Following DeZoort et al. (2002) and Rochmah Ika and Mohd Ghazali (2012), I

operationalize sustainability committee effectiveness (SC_EFFE) in four components:

(1) composition, (2) authority, (3) resources and (4) diligence. Details regarding every

component are explained below. In order to collect relevant data, I read the biography

of each committee member disclosed in annual reports and other external sources (e.g.

Bloomberg, Factiva and Google) to collect as much information as possible for data

analysis. An example of the collection is shown in Appendix E. This manual collection

process took seven months to complete.

(1) Composition

Composition consists of the percentage of independent directors and percentage

of directors with expertise regarding sustainability (Peters & Romi, 2014, 2015). In

order to determine expertise, this chapter follows Peters and Romi (2014, 2015): I read

53 Following the Corporate Governance Principles and Recommendations published by the Australian

Securities Exchange in 2010, 2014 and 2019, it is feasible to set up a board committee combining risk

management with sustainability. However, I do not find such practice in the second and third samples.

Future studies are encouraged to explore why this is the case.


the biography of each member for evidence about current or previous employment in

organizations about sustainability; positions as academics or scientists with research

in, or work relating to, sustainability-related disciplines; or with prior experience in

sustainability executive positions. This chapter uses the biographies provided in annual

reports, as well as those provided by other external sources, and labels a committee

member as sustainability expert if her/his profile matches criteria above.

(2) Authority

Committee authority includes two indicators, namely average board tenure and

average committee tenure of the committee members (Peters & Romi, 2015). Members

with a longer tenure are expected to hold more authority.

(3) Resources

Committee resources include the resources that are available to that committee.

Committee members’ personal characteristics, namely social connections, gender and

higher education qualifications, capture some of the resources that the committee can

rely upon (Gray & Nowland, 2013; Bugeja, Fohn & Matolcsy, 2016). It is argued that

overlap between the sustainability committee and the audit committee and overlap

between sustainability committee and risk management committee in membership

facilitates information flows in and out of the sustainability committee and coordinates

different board committees in integrating sustainability with corporate governance; in

this instance the overlap itself also is a resource.

(4) Diligence

Regarding committee diligence, it is essential for a sustainability committee to

diligently exercise its authority and use resources to contribute to better performance.

In Chapter 4, diligence consists of three indicators, namely meeting frequency (Zaman,

Hudaib & Haniffa, 2011; Al‐Shaer & Zaman, 2018), attendance (Chapple, et al., 2018;

Gray & Nowland, 2018; Nowland & Simon, 2018) and shareholding of committee

members.

I use a scoring system to calculate an overall score for committee effectiveness

(SC_EFFE). With respect to the committee composition, percentage of independent

directors and sustainability expert directors are summed to get a score of composition.


Performance 131

Regarding committee authority, board tenure and committee tenure have been

standardized by deducting a sample mean and then divided by the standard deviation

of the sample. Their z-scores are summed to calculate a score of the authority.

In terms of committee resources, the number of social connections per member

and the number of higher education qualifications per member are standardized by

deducting a sample mean and then divided by the standard deviation of the sample.

Their z-scores, percentage of female members and percentage of members sitting on

additional two committees (i.e. audit committee or risk management committee) are

summed to get a score of resources.

Regarding committee diligence, frequency of meetings and shareholding of

members are standardized by deducting a sample mean and divided by the standard

deviation of the sample. Meeting attendance and their z-scores are summed to calculate

a score of diligence. Finally, the scores of four components, composition, authority,

resources and diligence, are summed to calculate an overall score of sustainability

committee effectiveness (SC_EFFE).

There are three caveats to readers. First, data of the presence of a sustainability

committee (SC) from 2002 to 2016 were synthesized from three sources, namely the

Bloomberg, the Asset4 and annual reports. Thus, these data are expected to be more

reliable than if data were obtained from any single source. Secondly, raw data about

committee effectiveness (SC_EFFE) were manually collected. This manual approach

is consistent with prior literature about director characteristics in Australia, including

Bugeja et al. (2016) and Gray et al. (2016). As no database provides comprehensive

data about sustainability committee members in Australia54, I manually collected the

relevant data. Thirdly, the scoring system of sustainability committee effectiveness

(SC_EFFE) equally weights each characteristic, as there is no persuasive method to

determine which characteristics are more important.

4.4.3 Experience of Sustainability Disclosure (YEAR_REPORT)

Regarding the experience of sustainability disclosure (YEAR_REPORT), this

chapter uses the firms’ number of years experience regarding disclosure to reflect

54 Databases, including SIRCA and Connect4, provide too brief information about directors to be

useful in Chapter 4.


disclosure experience. Following Hironaka and Schofer (2002), Dobbin et al. (2009),

Tilcsik (2010) and Chandler (2014), firms with more years’ experience of utilising

sustainability disclosure acquire more experience of disclosure. Control variables are

discussed in following section.

4.4.4 Control Variables

Regarding control variables on sustainability performance, I control newness of

property, plant and equipment (NEW), firm size (SIZE), leverage (LEV), shareholding

concentration (SHARECON), market-to-book ratio (MTB), return on assets (ROA),

corporate governance performance (CG)55, existence of a risk management committee

(RMC) and capital expenditure (CAPEXP). Year and industries are controlled. Adams

(2004), Al-Tuwaijri et al. (2004), Clarkson et al. (2008), Clarkson et al. (2011), Delmas

and Toffel (2011), Malik (2015), Dienes et al. (2016), Khan et al. (2016) and Jain and

Jamali (2016) provide authority that the aforementioned variables ought to be

controlled. Larger firms are perceived to do better regarding sustainability (Gallo &

Christensen, 2011). Firms with high leverage or incurring more capital expenditure

may invest less on corporate sustainability, as resources on hand are restricted (Arora

& Dharwadkar, 2011). Those with high market-to-book ratio may invest less in

sustainability, as they have more profitable projects awaiting investment. Firms with

the latest property, plant and equipment can deliver better performance (Clarkson et

al., 2008). As suggested by Rankin et al. (2011) and Jain and Jamali (2016), two

governance variables are used as controls: namely CG and RMC. The details about

variables and their measurements are tabulated below.

55 Refer to Figure 3-1 and 3-2.

Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance 133

Table 4-2 Variables and Their Measurements Variable Abbr. Measurement Source(s)

Dependent Variables

Corporate Environmental

Performance

ENV Environmental scores assigned by the Thomson Reuters Asset4 Ioannou and Serafeim (2010), Cheng

et al. (2014) and Eccles et al. (2014)

Corporate Social Performance SOC Social scores assigned by the Thomson Reuters Asset4 Ioannou and Serafeim (2010), Cheng


Corporate Sustainability

Performance

CSP Mean of environmental scores and social scores assigned by the Thomson

Reuters Asset4

Ioannou and Serafeim (2010), Cheng


Independent Variables

Board Tenure of Committee

Members

BOARD_TEN Average years of committee members serving on the board – this variable

is standardized by deducting a sample mean and then divided by the

standard deviation of the sample in the scoring system.

Rochmah Ika and Mohd Ghazali

(2012)

Committee Tenure of Committee

Members

SC_TEN Average years of committee members serving on the committee – this

variable is standardized by deducting the sample mean and then divided

by the standard deviation of the sample in the scoring system.

Rochmah Ika and Mohd Ghazali

(2012) and Sultana (2015)

Higher Education Qualification SC_EDUCATION Average number of higher education qualifications held by the committee

members – this variable is standardized by deducting the sample mean and

then divided by the standard deviation of the sample in the scoring system.

Aldamen, et al. (2012) and Rochmah

Ika and Mohd Ghazali (2012)

Experts on Committee SC_EXP Percentage of members classified as sustainability experts Zaman, Hudaib and Haniffa (2011),

Aldamen, et al. (2012), Rochmah Ika

and Mohd Ghazali (2012), Sultana

(2015), Bryce, Ali and Mather (2015),

Appuhami and Tashakor (2017), Al‐Shaer and Zaman (2018) and

Endrawes, et al. (2018)

Experience of Sustainability

Disclosure

YEAR_REPORT Number of years that a firm has released its sustainability disclosure Edelman (1992)

Gender SC_GENDER Percentage of committee members who are women Rochmah Ika and Mohd Ghazali

(2012) and Appuhami and Tashakor

(2017)

Independence of Committee

Members

SC_INDEP Percentage of independent directors on committee DeZoort et al. (2002), Zaman, Hudaib

and Haniffa (2011), Aldamen, et al.

(2012), Rochmah Ika and Mohd

134Chapter 4: The Sustainability Committee, Experience of Sustainability Disclosure and Sustainability Performance

Variable Abbr. Measurement Source(s)

Ghazali (2012), Sultana (2015),

Appuhami and Tashakor (2017) and

Al‐Shaer and Zaman (2018)

Meeting Attendance SC_ATTEND Average percentage of meetings attended by committee members Rochmah Ika and Mohd Ghazali

(2012), Chapple, et al. (2018), Gray

and Nowland (2018) and Nowland and

Simon (2018)

Meeting Frequency SC_MEET Number of meetings held by the sustainability committee – this variable is

standardized by deducting the sample mean and then divided by the

standard deviation of the sample in the scoring system.

Zaman, Hudaib and Haniffa (2011),

Aldamen, et al. (2012), Rochmah Ika

and Mohd Ghazali (2012), Sultana (2015), Bryce, Ali and Mather (2015),

Appuhami and Tashakor (2017) and

Al‐Shaer and Zaman (2018)

Number of Sustainability

Committee

SC_NO Number of sustainability committees that a firm has in a year

Overlapping of Sustainability

Committee and Audit Committee

SC_AC Percentage of committee members serving on audit committee DeZoort et al. (2002) and Rochmah


Overlapping of Sustainability

Committee and Risk

Management Committee

SC_RMC Percentage of committee members serving on risk management committee DeZoort et al. (2002) and Rochmah


Presence of Sustainability Committee

SC A firm-year observation is coded one, if there is sustainability committee, and zero otherwise.

Shareholding of Committee

Members

SC_SHARE Average percentage of ordinary shares held by the committee members –

this variable is standardized by deducting the sample mean and then

divided by the standard deviation of the sample in the scoring system.

DeZoort et al. (2002) and Rochmah


Social Relations SC_RELATION Average number of social connections (e.g. directorship in other firms,

leadership in non-governmental organizations, and professorship in

universities disclosed in annual reports) held by committee members – this

variable is standardized by deducting the sample mean and then divided

by the standard deviation of the sample in the scoring system.

Gray, Harymawan, and Nowland

(2016) and Bugeja, Fohn, and

Matolcsy (2016)

Sustainability Committee Effectiveness

SC_EFFE Overall score of sustainability committee effectiveness based on four components, namely composition, authority, resources and diligence


Variable Abbr. Measurement Source(s)

Control Variables

Capital Expenditure CAPEXP Capital Expenditure

Total Assets

Clarkson et al. (2008) and Clarkson et

al. (2011)

Corporate Governance

Performance

CG Corporate governance scores assigned by the Thomson Reuters Asset4 Rankin et al. (2011)

Firm Size SIZE Ln Market Capitalization Clarkson et al. (2008) and Clarkson et

al. (2011)


Total Assets



Book Value


Newness of Property, Plant and

Equipment

NEW Net Property, Plant and Equipment

Gross Property, Plant and Equipmen

Al-Tuwaijri et al. (2004) and Clarkson

et al. (2008)


Total Assets

Al-Tuwaijri et al. (2004) and Clarkson

et al. (2008)

Risk Management Committee RMC Presence of a risk management committee Jain and Jamali (2016)

Shareholding Concentration SHARECON Percentage of ordinary shares owned by Top 20 shareholders Dienes et al. (2016)


4.4.5 Econometric Models

This chapter uses two equations to test three hypotheses. The first equation

estimates the effects of firms’ experience of sustainability disclosure (H3) and the

presence of a sustainability committee (H4a) on firms’ sustainability performance. It

corresponds to 2,166 firm-year observations between 2002 and 2016. The second

equation tests the relationship between sustainability committee effectiveness and

performance (H4b). It corresponds to 430 firm-year observations from 2002 to 2016.

Chapter 4 uses panel regression with robust standard errors. Time and industry fixed

effects are controlled. Regarding endogeneity, as instructed by Nguyen et al. (2018), I

use propensity score matching (PSM) and dynamic generalized method-of-moments

(GMM) to re-test H3 and H4a. As suggested by Kennedy (2008), Schultz et al. (2010),

Gippel et al. (2015), Wintoki et al. (2012) and Antonakis et al. (2010), endogeneity

can be due to several reasons, including omitted variables, omitted selection and

simultaneity. Consulting prior literature as to sustainability and using fixed effects, it

is reasonable to suggest that omitted variables do not cause endogeneity, as key control

variables are included, and fixed effects also are considered. Moreover, a focus on the

unexpected component of sustainability performance also minimizes effects of omitted

variables. Use of PSM and dynamic GMM can further minimize the effects of omitted

selection and simultaneity.

Several additional tests are performed. Several ways to measure sustainability

performance are used. Following Cho and Patten (2007) and Eccles et al. (2014), how

sectoral environment influences findings regarding H3, H4a and H4b are examined.

As the samples include 15 years (2002 – 2016), it is interesting to analyse whether

findings regarding H3, H4a and H4b are stable over time. This chapter takes the first

five years (2002 – 2006) and the last five years (2012 – 2016) to test whether the

findings are robust over time. Findings are detailed in following sections, and two

equations are presented below:

(1) 𝐶𝑆𝑃𝑖,𝑡 = 𝑏0 + 𝑏1𝑆𝐶𝑖,𝑡 + 𝑏2𝑌𝐸𝐴𝑅_𝑅𝐸𝑃𝑂𝑅𝑇𝑖,𝑡 + 𝑏3𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑏4𝑅𝑂𝐴𝑖,𝑡 + 𝑏5𝑀𝑇𝐵𝑖,𝑡 +

𝑏6𝑁𝐸𝑊𝑖,𝑡 + 𝑏7𝐿𝐸𝑉𝑖,𝑡 + 𝑏8𝐶𝐴𝑃𝐸𝑋𝑃𝑖,𝑡 + 𝑏9𝐶𝐺𝑖,𝑡 + 𝑏10𝑆𝐻𝐴𝑅𝐸𝐶𝑂𝑁𝑖,𝑡 + 𝑏11𝑅𝑀𝐶𝑖,𝑡 +

𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡

(2) 𝐶𝑆𝑃𝑖,𝑡 = 𝑏0 + 𝑏1𝑆𝐶_𝐸𝐹𝐹𝐸𝑖,𝑡 + 𝑏2𝑌𝐸𝐴𝑅_𝑅𝐸𝑃𝑂𝑅𝑇𝑖,𝑡 + 𝑏3𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑏4𝑅𝑂𝐴𝑖,𝑡 +

𝑏5𝑀𝑇𝐵𝑖,𝑡 + 𝑏6𝑁𝐸𝑊𝑖,𝑡 + 𝑏7𝐿𝐸𝑉𝑖,𝑡 + 𝑏8𝐶𝐴𝑃𝐸𝑋𝑃𝑖,𝑡 + 𝑏9𝐶𝐺𝑖,𝑡 + 𝑏10𝑆𝐻𝐴𝑅𝐸𝐶𝑂𝑁𝑖,𝑡 +

𝑏11𝑅𝑀𝐶𝑖,𝑡 + 𝑌𝑒𝑎𝑟 + 𝐼𝑛𝑑𝑢𝑠𝑡𝑟𝑦 + 𝜀𝑖,𝑡


Performance 137

4.5 RESULTS

4.5.1 Descriptive Statistics

Descriptive statistics are presented in Table 4-3. The first sample (with 2,166

firm-year observations) is presented in Panel A of Table 4-3. Clearly, there is much

variance in sustainability performance with minimum score at 0 and maximum score

at 97.89. Firms in the first sample have a maximum of three sustainability committees.

On average, sample firms have four years’ experience of disclosure. Compared with

the sample analysed in Rankin et al. (2011), firms in the first sample are smaller in

firm size, have higher leverage ratio and report lower return on assets. As presented in

Panel B of Table 4-3, about half of the firms in the first sample have a risk management

committee, and one fifth have a sustainability committee. The percentage of firms with

a sustainability committee in the first sample is comparable to the percentage of firms

with an environmental committee (18.7%) in Rankin et al. (2011).

The second sample of 430 firm-year observations regarding the sustainability

committees is presented in Panel C of Table 4-3. Regarding committee composition,

84% of committee members are reported as independent, and 11% are sustainability

experts. Regarding committee authority, average board tenure is 5.94 years, and an

average committee tenure is 3.59 years. Regarding resources, 17% of them are women,

49% sit on an audit committee, and 34% sit on a risk management committee. 56 On

average, sustainability committee members hold 2.38 higher education qualifications

and 2.92 positions in other organizations or firms. Compared with directors analysed

in Gray and Nowland (2013), sustainability committee members in this chapter hold

comparable number of higher education qualifications and are more active (i.e. they

sit on more other organizations). A committee consists of 4.12 directors. Regarding

diligence, a committee holds 3.6 meetings per year, average attendance rate is 96%,

and members in a committee hold 0.3% of ordinary shares. It is reasonable to argue

that sustainability committees in the second sample are comparable with committees

analysed in other studies, including Rodrigue et al. (2013), Peters and Romi (2014,

2015) and Dixon-Fowler et al. (2017). It is noteworthy prior studies do not include as

56 It is noteworthy that audit committees are compulsory to listed firms in Australia, and risk

management committees are strongly encouraged for listed firms in Australia.


many characteristics of a sustainability committee as this chapter does. Correlation of

variables is presented in Table 4-4. It is interesting to notice that firms’ sustainability

performance is positively related to the presence of a sustainability committee and

effectiveness of a sustainability committee.

Table 4-3 Descriptive Statistics Panel A presents descriptive statistics about important variables. Panel B presents the number of risk management committees and the number of sustainability committees. It is noteworthy that

audit committee is compulsory to public firms in Australia. Panel C presents the characteristics of

the sustainability committee that are used to calculate scores about committee effectiveness.

Variables in this table are defined in Table 4-2.

Panel A Dependent and

Independent Variables

N MEAN STD.DEV MIN MAX

CSP 2166 39.03 26.28 0 97.885

ENV 2166 37.51 28.15 0 97.22

SOC 2166 39.99 28.13 0 98.89

SC_NO 2166 0.21 0.42 0 3

YEAR_ REPORT 2166 4.02 3.21 0.00 14

ROA 2166 0.02 0.21 -1.69 2.54

LEV 2166 0.45 0.24 0.004 1.32 MTB 2166 2.12 2.91 -28.43 38.11

Market Capitalization (in Billions) 2166 4.30 0.03 4.22 4.38

CG 2166 61.82 26.65 0.00 97.51

NEW 2166 0.63 0.23 0.00 1.00

CAPEXP 2166 0.08 0.11 0.00 1.00

SHARECON 2166 62.83 24.04 0.00 97.39

Panel B Frequency TOTAL PERCENTAGE

SC 430 19.85

RMC 1115 51.48

Panel C Characteristics of

Sustainability Committee

N MEAN STD.DEV MIN MAX

SC_INDEP 430 0.84 0.20 0 1

SC_EXP 430 0.11 0.20 0 1

BOARD_TEN 430 5.94 2.49 0 20.67

SC_TEN 430 3.59 1.76 0 8.75

SC_AC 430 0.49 0.26 0 1 SC_RMC 430 0.34 0.32 0 1

SC_GENDER 430 0.17 0.18 0 1

SC_RELATION 430 2.92 1.38 0 6.75

SC_EDUCATION 430 2.38 0.78 0 6

SC_MEET 430 3.60 1.32 0 10

SC_ATTEND 430 0.96 0.10 0 1

SC_SHARE 430 0.003 0.02 0 0.15

Size of Sustainability Committee 430 4.12 1.45 1 10


Table 4-4 Correlation Matrix of Variables A correlation matrix of variables is presented in this table. The variables tabulated below are described in Panel A of Table 4-3. Variables in Panel B of Table 4-3 are not

included, as they are dummy variables. Variables in this table are defined in Table 4-2. Variable CSP SC_NO SC_EFFE SIZE LEV ROA MTB NEW CAPEXP CG SHARECON YEAR_REPORT

CSP 1 SC_NO 0.345*** 1 SC_EFFE 0.380*** -0.139*** 1 SIZE 0.549*** 0.0173*** 0.271*** 1 LEV -0.012 -0.010 0.195*** -0.053*** 1 ROA 0.024 -0.034* 0.037 -0.184*** -0.019 1 MTB 0.013 -0.032 0.030 -0.231*** -0.002 0.9895*** 1 NEW -0.124*** -0.022 -0.077 -0.029 -0.128*** 0.086*** 0.088*** 1

CAPEXP -0.010 -0.037* -0.158*** -0.251*** -0.001 0.981*** 0.991*** 0.117*** 1 CG 0.555*** 0.287*** 0.221*** 0.363*** -0.009 0.019 0.009 -0.109*** -0.001 1 SHARECON 0.020 0.088*** -0.047 0.021 -0.087*** -0.019 -0.024 -0.141*** -0.022 0.044** 1 YEAR_REPORT 0.483*** 0.122*** 0.711 *** 0.289*** 0.014 0.039** 0.044** -0.202*** 0.018 0.355*** 0.077*** 1



4.5.2 Experience of Sustainability Disclosure, the Presence of a Sustainability

Committee and Sustainability Performance – Equation (1) – H3 and H4a

Findings regarding H3 and H4a are shown in Table 4-5. As the number of years’

experience (YEAR_REPORT) is positively and significantly related to sustainability

performance (CSP), H3 is not rejected. Following Section 3.5.5 that uses Fisher-type

Augmented Dickey-Fuller Test to perform unit root test, I also used this test to check

stationarity of CSP data. At significance level of 1%, I rejected the null hypothesis that

CSP data is non-stationary. Thus, findings about H3 is not influenced by co-integration

issue, and sample firms with a longer duration of disclosure deliver better performance.

While H4a is about the presence of a sustainability committee, where a firm has

more than one sustainability committee, I substitute the presence of a sustainability

committee with the number of sustainability committees to provide more evidence

about this hypothesis. How the presence of a sustainability committee and the number

of sustainability committees are related to sustainability performance, respectively, are

shown in the first two columns of Table 4-5. The presence of a committee is

significantly related to sustainability performance, β = 9.928 (p<0.01), and the number

of committees is also significantly related to performance, β = 9.836 (p<0.01).

How the presence of this committee is related to environmental performance and

to social performance, respectively, is shown in the second two columns of Table 4-5.

The presence of a sustainability committee is significantly related to environmental

performance, β = 10.461 (p<0.01), and social performance, β = 9.097 (p<0.01). Thus,

H4a is rejected. Apparently, the effect of presence of a sustainability committee and

number of sustainability committees on firms’ sustainability performance is strong.

Regarding controls, firm size (Serafeim, 2013) and firms’ corporate governance

performance (Walls et al., 2012) are positively related to sustainability performance.

Leverage is negatively related to firms’ sustainability performance. Firms with higher

leverage hold less slack, restricting their investment in corporate sustainability (Arora

& Dharwadkar, 2011). Findings therefore support institutional theory and stewardship

theory. In terms of H3, Chapter 4 finds firms with more experience of sustainability

disclosure deliver better performance. Regarding H4a, this chapter reveals that the

presence of a sustainability committee can improve sustainability performance. The

aforementioned findings are consistent with prior literature in the US, including Walls

et al. (2012) and Dixon-Fowler et al. (2017).


Performance 141

Table 4-5 Experience of Sustainability Disclosure, the Presence of a Sustainability

Committee and Sustainability Performance – H3 and H4a This table presents the results of analysis of the relationship between experience of sustainability disclosure and sustainability performance and relationship between the presence of a sustainability

committee and such performance. The first two columns indicate the presence of a sustainability

committee and the number of such committees, respectively. The second two columns show

environmental performance and social performance, respectively. Variables in this table are described

in Table 4-2. In terms of model fit, the Equation (1) arguably is fit – it is based on prior studies, and

the proportion of variance is comparable with proportion of variance explained by prior studies.

(1) (2) (3) (4)

DV: CSP DV: CSP DV: ENV DV: SOC

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

SC 9.928

(3.68)***

- 10.461

(3.55)***

9.097

(3.02)***

SC_NO -

9.836

(3.89)***

- -

YEAR_REPORT 3.773

(7.03)***

3.795

(7.09)***

4.317

(6.82)***

3.296

(5.56)***

SIZE 2.493

(3.71)***

2.457

(3.66)***

2.441

(3.08)***

2.313

(2.98)***

LEV -4.837

(-1.72)*

-4.864

(-1.73)*

-3.211

(-0.95)

-6.313

(-2.09)**

ROA -0.017

(-1.13)

-0.017

(-1.11)

0.031

(1.77)*

0.005

(0.29)

MTB 0.036

(1.65)

0.036

(1.67)*

0.022

(0.91)

0.041

(1.61)

NEW -0.779 (-0.50)

-0.797 (-0.51)

-1.106 (-0.64)

-0.365 (-0.23)

RMC 1.565

(1.60)

1.570

(1.60)

1.849

(1.55)

1.720

(1.62)

CAPEXP -0.012

(-0.63)

-0.013

(-0.66)

0.004

(0.21)

-0.018

(-0.83)

CG 0.229

(7.74)***

0.226

(7.60)***

0.189

(5.49)***

0.273

(7.93)***

SHARECON 0.013

(0.41)

0.012

(0.38)

0.008

(0.23)

0.005

(0.12)

CONS -38.285

(-3.99)***

-38.104

(-3.99)***

-32.428

(-3.10)***

-32.178

(-2.81)***

Firm FE YES YES YES YES Year FE YES YES YES YES

Industry FE YES YES YES YES

Observations 2166 2166 2166 2166

Adjusted R-

square

0.63 0.62 0.57 0.55



4.5.3 Relationship between Sustainability Committee Effectiveness and

Sustainability Performance – Equation (2) – H4b

Findings regarding H4b are shown in Table 4-6. How sustainability committee

effectiveness as a whole is related to sustainability performance, environmental

performance and social performance is presented in the first three columns. As

presented in Table 4-6, sustainability committee effectiveness is positively related to

environmental performance, β = 1.499 (p<0.05), and effect of sustainability committee

effectiveness on firms’ environmental performance is also economically significant.

Thus, H4b is partially rejected, that is sustainability committee effectiveness is not

associated with sustainability performance as a whole. Additionally, how the four

components of sustainability committee effectiveness, namely composition, authority,

resources and diligence, are related to performance is presented in the second three

columns. As presented in Table 4-6, resources are positively related to environmental

performance, β = 3.177 (p<0.01), and authority is positively related to environmental

performance, β =1.829 (p<0.10). These two components of committee effectiveness

are economically significant. The control variables also behave as expected.


Table 4-6 Sustainability Committee Effectiveness and Sustainability Performance – H4b This table presents the results of the analysis of the relationship between sustainability committee effectiveness and sustainability performance. The first three columns show

relationships between committee effectiveness and sustainability performance, environmental performance and social performance, respectively. The second three columns

show relationships between the four components of effectiveness and three types of performance. Variables in this table are described in Table 4-2. In terms of model fit, the

Equation (2) arguably is fit – it is based on prior studies, and the proportion of variance is comparable with proportion of variance explained by prior studies. (1) (2) (3) (4) (5) (6)

DV: CSP DV: ENV DV: SOC DV: CSP DV: ENV DV: SOC

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

SC_EFFE 0.599

(1.18)

1.499

(2.04)**

-0.052

(-0.96)

- - -

Composition - - - -13.941

(-1.39)

-16.577

(-1.36)

-11.305

(-1.23)

Authority - - - 0.392 (0.36)

1.829 (1.93)*

-1.045 (-0.82)

Resources - - - 1.703

(1.52)

3.177

(2.68)***

0.229

(0.18)

Diligence - - - 1.437

(0.73)

-0.472

(-0.19)

3.346

(1.42)

YEAR_REPORT 3.762

(2.83)***

5.848

(3.45)***

0.505

(3.10)***

2.723

(1.47)

4.844

(2.10)***

0.602

(0.38)

SIZE 2.293

(0.21)

-0.575

(-0.40)

-0.100

(-0.82)

0.649

(0.47)

0.220

(0.17)

1.518

(0.72)

LEV -11.564

(-2.37)**

-16.083

(-2.96)***

0.027

(0.06)

-12.369

(-2.32)**

-18.213

(-3.11)***

6.525

(0.98) ROA 0.034

(0.63)

0.051

(0.75)

0.006

(1.26)

0.036

(0.67)

0.062

(0.94)

0.010

(0.17)

MTB 0.038

(0.38)

-0.041

(-0.57)

0.002

(0.45)

0.045

(0.48)

0.031

(0.41)

0.121

(1.01)

NEW -8.580

(-0.98)

-19.804

(-1.81)*

0.553

(0.94)

-11.478

(-1.26)

-22.405

(-1.92)*

-0.552

(-0.05)

RMC 1.281

(0.70)

3.148

(1.30)

-0.076

(-0.58)

1.063

(0.64)

2.883

(1.37)

-0.756

(-0.48)

CAPEXP 0.060

(0.50)

0.017

(0.11)

-0.001

(-0.05)

0.064

(0.56)

0.051

(0.34)

0.077

(0.65)


CG 0.327

(5.42)***

0.278

(3.61)***

0.010

(2.19)**

0.350

(5.35)***

0.310

(3.86)***

0.390

(6.01)***

SHARECON 0.236

(2.48)**

0.248

(1.94)*

0.010

(1.82)*

0.228

(2.64)**

0.231

(1.87)*

0.225

(2.85)***

CONS -19.705

(-0.82)***

-38.236

(-1.47)

-2.234

(-0.85)

-6.601

(-0.21)***

-19.020

(-0.55)***

5.819

(0.16)

Firm FE YES YES YES YES YES YES

Year FE YES YES YES YES YES YES

Industry FE YES YES YES YES YES YES

Observations 430 430 430 430 430 430

Adjusted R-square 0.16 0.43 0.10 0.36 0.35 0.24



Performance 145

Findings of H4b support committee effectiveness as discussed by DeZoort et al.

(2002) and the resources dependency theory. On one side, the sustainability committee

effectiveness and its two components (i.e., resources and authority) are significantly

related to environmental performance, reinforcing the argument that who sits on the

sustainability committee, and how they are grouped as a whole matter. On the other

side, sustainability committee effectiveness is not related to social performance. Social

performance includes customer and product responsibility, community, human rights,

diversity and opportunity, health and safety, employment quality, as well as training

and development (refer to Appendix 1). Thus, a speculation about this insignificant

relationship between the sustainability committee effectiveness and social

performance is that social issues are managed by the firms’ other departments,

mechanisms, or structures, rather than their sustainability committees. For example, in

relation to workers’ training and development and , labour relations, managers and

boards of directors may choose to supervise relevant these issues through other

mechanisms (e.g., risk management committee). Future studies are encouraged to

analyse if not by sustainability committee, which corporate governance mechanisms

are used to supervise social issues, and why social issues seem to be marginalized on

the agenda of the sustainability committee.

Arguably, this chapter extends on the studies of Gray et al. (2016) and Nowland

and Simon (2018) who examine director characteristics in Australia from board level

to committee level. Extending Rankin et al. (2011), Rodrigue et al. (2013), and Dixon-

Fowler et al. (2017) who investigate the presence of sustainability committee, Chapter

4 analyses a relatively novel direction, namely sustainability committee effectiveness.

Different from Peters and Romi (2015) who identify that composition of sustainability

committee (i.e., experts on committee) is related to use of assurance on sustainability

disclosure, I reveal that committee authority and resources are related to environmental

performance. In the following sections, Chapter 4 conducts robustness tests as

instructed by prior studies.

4.5.4 Robustness Test One – Endogeneity in H3 and H4a – PSM

Following Antonakis et al. (2010), Mishra (2014), Michelon et al. (2015) and

Nguyen et al. (2018), this chapter adopts PSM method to address omitted selection in

testing H3 and H4a. Two hypotheses are re-examined by matched-sample design. With

regard to H3, sample firms are grouped according to their experience of sustainability


disclosure (YEAR_REPORT). We code the value of one, if a firm-year observation’s

YEAR_REPORT is greater than the median of the full sample, and zero otherwise. A

propensity score is calculated from the first-stage model to predict whether a firm’s

YEAR_REPORT is above the median. The prediction model has all control variables

of Equation (1). Each firm-year observation whose YEAR_REPORT above median is

matched with another observation whose YEAR_REPORT is not. It is noteworthy that

this PSM analysis is based on 2,166 firm-year observations. Findings from this PSM

analysis are tabulated in Table 4-7. Panel A of Table 4-7 presents that the matching

procedure is valid, as all matched variables are statistically indistinguishable. Panel B

of Table 4-7 presents after using the PSM analysis to address for potential endogeneity,

YEAR_REPORT still is found to be positively related to CSP, β = 3.864 (p<0.01).

Regarding H4a, similarly, a propensity score is calculated from the first-stage

model to predict a firm with a sustainability committee. The prediction model includes

all control variables of Equation (1). Then each firm-year observation that corresponds

to a sustainability committee is matched with another observation that does not. It is

noteworthy that this PSM analysis is based on 2,166 firm-year observations. Findings

from this PSM analysis are tabulated in Table 4-8. As presented in Panel A of Table

4-8, matched variables at the first stage are statistically indistinguishable, suggesting

that the matching procedure is valid. Panel B of Table 4-8 shows that the presence of

a sustainability committee is positively related to sustainability performance, β = 7.424

(p<0.01); the firms’ experience of sustainability disclosure positively relates to

sustainability performance, β = 3.536 (p<0.01). Taken together, findings about H3 and

H4a remain qualitatively unchanged.


Performance 147

Table 4-7 PSM – H3 Panel A presents the results of propensity-matched variables when dependent variable is a dummy

variable that reflects whether a firm’s experience of sustainability disclosure is above median.

YEAR_REPORT_DUMMY is coded with the value of one, if a firm’s experience of sustainability

disclosure is above industry-year median, and the value of zero otherwise. Panel B presents the

regression results. Variables in this table are defined in Table 2.

Panel A: Propensity-matched Variables

Treated (SC) Controlled (no SC) t-stat P-value

SIZE 14.19 14.21 -0.27 0.79

LEV 0.47 0.47 -0.03 0.98

ROA 0.07 0.07 -0.46 0.65

MTB 2.52 3.06 0.75 0.45

NEW 0.55 0.55 -0.56 0.58 RMC 0.64 0.64 -0.06 0.96

CAPEXP 0.08 0.09 -1.32 0.14

CG 70.65 70.10 -0.61 0.54

SHARECON 68.77 68.73 0.04 0.97

Panel B: PSM Regression

DV: CSP

Coeff.

(t-stat)

YEAR_REPORT_DUMMY 3.864***

(8.42)

SC 5.959***

(4.48)

SIZE 2.381*** (4.45)

LEV 3.967

(1.41)

ROA 0.017

(0.91)

MTB 0.084**

(2.00)

NEW -1.464

(-0.49)

RMC 0.247

(0.28)

CAPEXP -0.100** (-2.34)

CG 0.249***

(10.12)

SHARECON 0.023

(0.71)

Constant -2.619***

(-3.06)

Observations 912




Table 4-8 PSM – H4a This chapter uses propensity score matching (PSM) to re-test H3 and H4a, namely the relationship between experience of sustainability disclosure and sustainability performance, and relationship

between the presence of a sustainability committee and sustainability performance. Panel A presents

the results of propensity-matched variables when dependent variable is sustainability performance.

Panel B presents the regression results as to H3 and H4a. Variables in this table are defined in Table

4-2. Standard errors are corrected for clustering by firms.

Panel A: Propensity-matched

Variables

Treated (SC) Controlled (no

SC)

t-stat P-value

SIZE 14.76 14.61 1.18 0.240

YEAR_REPORT 5.192 6.018 3.16 0.020

LEV 0.45 0.47 -1.89 0.059

ROA 0.07 0.07 -0.46 0.647

MTB 2.52 3.06 0.75 0.453 NEW 0.61 0.60 1.04 0.296

RMC 0.62 0.61 0.37 0.714

CAPEXP 0.08 0.09 -1.32 0.138

CG 76.76 75.54 0.79 0.431

SHARECON 68.76 68.45 0.22 0.830

Panel B: PSM Regression

DV: CSP

Coeff.

(t-stat)

SC 7.424

(4.56)***

YEAR_REPORT 3.536

(7.08)***

SIZE 3.641

(4.78)***

LEV -12.748

(-3.40)***

ROA -0.021

(-0.51)

MTB -0.010

(-0.22)

NEW -14.264

(-3.38)***

RMC 2.783 (2.17)**

CAPEXP -0.040

(-0.47)

CG 0.324

(7.94)***

SHARECON 0.039

(0.84)

CONS -5.068

(-4.44)***

Observations 671




Performance 149

4.5.5 Robustness Test Two – Endogeneity in H3 and H4a – Dynamic GMM

Following Schultz et al. (2010), Wintoki et al. (2012) and Nadeem, Zaman, and

Saleem (2017), Chapter 4 uses dynamic GMM to control the effects of sustainability

performance in one period on performance in following period. Two hypotheses are

re-tested using dynamic GMM. Findings from dynamic GMM are tabulated below. As

shown in Table 4-9, the presence of a sustainability committee is positively related to

sustainability performance, β = 5.626 (p<0.01); experience of disclosure is positively

related to sustainability performance, β = 4.185 (p<0.01). Thus, the findings as to H3

and H4a remain qualitatively unchanged.

Table 4-9 Dynamic GMM – H3 and H4a This chapter uses dynamic generalised method-of-moments (GMM) to re-test H3 and H4a,

namely the relationship between experience of sustainability disclosure and sustainability

performance, and the relationship between the presence of a sustainability committee and sustainability performance. Variables in this table are defined in Table 4-2.

DV: CSP

Coeff.

(t-stat)

L1.CSP 0.117

(5.03)***

L2.CSP 0.001

(0.07)

SC 5.626

(3.54)***

YEAR_REPORT 4.185

(10.72)***

SIZE 2.209

(4.13)*** LEV 2.665

(1.28)

ROA -0.011

(-0.78)

MTB 0.014

(0.59)

NEW -8.013

(-2.98)***

RMC 2.034

(2.55)**

CAPEXP -0.013 (-0.55)

CG 0.201

(8.58)***

SHARECON -0.037

(-1.35)

CONS -14.641

(-1.48)

Observations 1266

No. of instruments 122

Arellano-Bond AR (1) -5.128***

Arellano-Bond AR (2) -0.644



4.5.6 Robustness Test Three – Endogeneity in H4b – Dynamic GMM

Following Schultz et al. (2010), Wintoki et al. (2012) and Nadeem, Zaman, and

Saleem (2017), Chapter 4 uses dynamic GMM to control the effects of sustainability

performance in one period on performance in the following period. H4b is re-tested

using dynamic GMM. Findings from dynamic GMM are tabulated below. As shown

in Table 4-10, the sustainability committee effectiveness is positively related to

sustainability performance, β = 7.803 (p<0.10). Thus, the finding as to H4b remains

qualitatively unchanged.

Table 4-10 Dynamic GMM – H4b This chapter uses dynamic generalised method-of-moments (GMM) to re-test H4b, namely the relationship between sustainability committee effectiveness and sustainability performance.


DV: CSP

Coeff.

(t-stat)

L1.CSP 0.074

(1.32)

SC_EFFE 7.803

(1.79)*

Observations 396

No. of instruments 122

Arellano-Bond AR (1) -5.04***


4.5.7 Robustness Test Four – Endogeneity in H4b – Two-Stage Least Squares

Regression (2SLS)

As I do not find matched samples to carry out PSM, I use a two-stage least square

(2SLS) approach to solve reverse causality and omitted variable concerns (Wooldridge

2010). As Section 4.5.1 indicates, firms in some industries are more likely to establish

sustainability committees than their peers in other industries. Thus, I expect that

sustainability committee effectiveness converges to an industry average. Restated, I

argue that sustainability committee effectiveness at firm level is influenced by year-

industry average of sustainability committee effectiveness (SC_EFFE_INDUS),

which is not directly related to sustainability performance at that firm level. Findings

rendered by the 2SLS approach are presented in Table 4-11. Panel A of Table 4-11

shows that the results of the first stage 2SLS – the endogenous variable sustainability

committee effectiveness at firm level (SC_EFFE) is significantly related to the

instrumental variable, SC_EFFE_INDUS. This supports that firm-level SC_EFFE is

closely related to its industry norms, as captured by SC_EFFE_INDUS. Panel B of

Table 4-11 shows the results of the second stage 2SLS. I find the results are consistent


Performance 151

with those reported in Table 4-6. To test the validity of my instrument, I conduct the

Wu–Hausman (Hausman, 1978; Wu 1974) test. The results are shown at the bottom of

Table 4-11. The null hypothesis – firms’ sustainability committee effectiveness (SC_

EFFE) is exogenous – is not rejected, indicating the validity of my instrument.

Table 4-11 2SLS – H4b This chapter uses two-stage least squares regression (2SLS) to re-test H4b, namely the

relationship between sustainability committee effectiveness and sustainability performance.


Panel A Stage One of 2SLS

SC_EFFE Coeff.

(t-stat)

SC_EFFE_INDUS 0.76

(4.64)***

Other Controls Included YES

Year FE YES

Industry FE YES

Panel B Stage Two of 2SLS

DV: CSP

Coeff.

(t-stat)

SC_EFFE 8.55

(3.60)***

SIZE 3.83 (3.62)***

LEV 16.03

(2.20)**

ROA -0.04

(-0.56)

MTB -0.09

(-1.39)

NEW -18.15

(-3.33)***

RMC 4.45

(2.21)**

CAPEXP -0.02 (-0.01)

CG 0.32

(5.20)***

SHARECON 0.12

(1.57)

Constant -12.20

(-7.59)***

Year FE Yes

Industry FE Yes

Observations 430

Adjusted R-square 0.55 Wu–Hausman test for validity of instrument 0.177



4.5.8 Robustness Test Five – Alternative Measurement on Sustainability

Performance

Three types of performance, namely sustainability performance, environmental

performance and social performance, are used in the main analysis. Following Nguyen

et al. (2018), to further test how the presence of a sustainability committee is related

to sub-categories of sustainability performance, I test nine sub-categories separately.

The findings are presented in Table 4-12. The presence of a sustainability committee

is positively related to six sub-categories, resource reduction, emission reduction,

health and safety, product responsibility, training and development and community

(refer to Panel A of Table 4-12). Sustainability committee effectiveness is positively

related to two sub-categories, namely resource reduction and emission reduction (see

Panel B of Table 4-12). The findings presented in Table 4-10 reinforce the findings

concerning H4a and H4b.


Table 4-12 Alternative Measurement on Sustainability Performance This table presents the results of the relationship between a sustainability committee and nine sub-categories of sustainability performance. Panel A presents the results of

relationships between the presence of a sustainability committee and the nine sub-categories of sustainability performance. Panel B presents the results of relationships

between effectiveness of sustainability committee and nine sub-categories of sustainability performance. Resource reduction is abbreviated as ENRR, emission reduction

is abbreviated as ENER, product innovation is abbreviated as ENPI, product responsibility is abbreviated as SOPR, health and safety is abbreviated as SOHS, training

and development is abbreviated as SOTD, diversity and opportunity is abbreviated as SODO, employment quality is abbreviated as SOEQ, and community is abbreviated as SOCO. Other variables in this table are defined in Table 4-2.

Panel A The Presence of a Sustainability Committee (1) (2) (3) (4) (5) (6) (7) (8) (9)

ENRR ENER ENPI SOEQ SOHS SOTD SODO SOCO SOPR

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

SC 3.788 (2.60)***

5.724 (4.38)***

0.106 (0.08)

1.924 (1.04)

3.217 (2.18)**

3.380 (1.92)*

0.510 (0.31)

5.411 (3.03)***

3.698 (2.32)**

CONS 42.400

(5.76)***

55.514

(8.39)***

32.820

(4.89)***

46.927

(5.02)***

51.194

(6.85)***

30.660

(3.45)***

79.350

(9.48)***

38.487

(4.25)***

60.378

(7.50)*** Controls YES YES YES YES YES YES YES YES YES Firm FE YES YES YES YES YES YES YES YES YES

Industry FE YES YES YES YES YES YES YES YES YES Year FE YES YES YES YES YES YES YES YES YES

Adjusted R-square 0.06 0.04 0.03 0.04 0.02 0.07 0.11 0.07 0.01

Panel B Effectiveness of the Sustainability Committee

(1) (2) (3) (4) (5) (6) (7) (8) (9)

ENRR ENER ENPI SOEQ SOHS SOTD SODO SOCO SOPR

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

SC_EFFE 2.539 (2.68)***

2.218 (2.68)***

0.285 (0.29)

-1.510 (1.15)

0.996 (1.08)

-0.978 (-0.88)

0.858 (0.86)

-1.660 (-1.43)

-1.326 (-1.07)

CONS 4.313 (0.09)

53.922 (1.34)***

-27.325 (-0.56)

63.725 (0.99)

82.540 (1.83)*

18.884 (0.35)

-11.748 (-0.24)

-71.114 (-1.26)

38.085 (0.63)

Controls YES YES YES YES YES YES YES YES YES Firm FE YES YES YES YES YES YES YES YES YES

Industry FE YES YES YES YES YES YES YES YES YES Year FE YES YES YES YES YES YES YES YES YES

Observations 430 430 430 430 430 430 430 430 430 Adjusted R-square 0.02 0.04 0.02 0.01 0.01 0.03 0.03 0.05 0.08



4.5.9 Robustness Test Six – Sectoral Analysis

Following Cho and Patten (2007) and Eccles et al. (2014), Chapter 4 classifies

the GICS industries into two pairs of categories, (1) natural versus non-natural57; (2)

business-to-consumer (B2C) and others58. In terms of the first pair, this chapter codes

the value of one for industries whose products are deemed as sensitive to sustainable

development (the natural industries), and the value of zero otherwise (the non-natural

industries) (De Villiers et al., 2011). I argue that firms in natural sectors are subject to

more pressures about corporate sustainability (Cho et al., 2015); thus, the relationship

between the presence of a sustainability committee and sustainability performance

may be affected. In terms of the second pair, Chapter 4 codes the value of one for B2C

sectors and the value of zero otherwise. Following Eccles et al. (2014), I argue that

firms in B2C sectors are more visible as they directly interact with consumers. Thus,

firms in B2C sectors care more about image and reputation than their peers in other

sectors. The relationship between the presence of a sustainability committee and

performance can be influenced by such concerns. The findings are presented in Table

4-13. Panel A of Table 4-13 presents natural versus non-natural, and Panel B of Table

4-13 reports B2C versus others.

57 Following de Villiers, Naiker and Van Staden (2011, p. 1650), natural industries include forestry,

metal mining, coal mining and oil and gas exploration, paper and pulp mills, chemicals,

pharmaceutical and plastics manufacturing, iron and steel, manufacturing and electricity, gas and

wastewater. 58 Following Eccles et al. (2014, p. 2850), B2C industries include consumer goods and finance.


Table 4-13 Sectoral Analysis This table presents the results of sector moderation effects on the relation between the presence of a sustainability committee and sustainability performance. Panel A

shows how industry affiliation based on natural versus non-natural affects the relationship between sustainability performance and the sustainability committee. Natural is

coded as a dummy variable – firms in natural industries are coded one, and zero otherwise. Panel B shows how industry affiliation based on B2C versus others affects this

relationship. B2C is coded as a dummy variable – firms in B2C industries are coded one, and zero otherwise. Variables in this table are defined in Table 4-2.

Panel A Natural versus Non-natural

(1) (2) (3) (4) (5) (6)

CSP ENV SOC CSP ENV SOC

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

SC 0.263

(0.06)

2.523

(0.52)

-1.671

(-0.34)

-

- -

SC_EFFE - - - 3.184

(0.70)

3.618

(2.48)**

2.750

(0.21)

Natural -5.302

(-1.87)*

-6.526

(-1.93)*

-5.119

(-1.35)

46.405

(0.84)

37.217

(1.19)

5.593

(0.32)

Natural × SC 15.922

(3.29)***

13.158

(2.43)**

17.840

(3.30)***

- - -

Natural × SC_EFFE

- - - 3.837

(0.75)

3.162

(1.90)*

4.512

(0.96) CONS -35.898

(-3.82)***

-29.395

(-2.78)***

-29.881

(-2.71)***

-52.295

(-1.08)

-62.110

(-1.14)

-42.480

(-0.88)

Controls included YES YES YES YES YES YES


Observations 2166 2166 2166 430 430 430

Adjusted R-square 0.64 0.57 0.57 0.48 0.41 0.43

Panel B B2C versus Others

(1) (2) (3) (4) (5) (6)


Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

Coeff.

(t-stat)

SC 11.504

(4.23)***

12.587

(4.42)***

9.900

(3.02)***

-

- -

SC_EFFE -

- - 0.513

(1.08)

1.552

(2.10)**

-0.526

(-0.79)


B2C 0.103

(0.03)

-1.172

(-0.29)

0.455

(0.10)

6.057

(0.28)

25.367

(0.99)

-13.253

(-0.57)

B2C × SC -7.726

(-1.04)

-10.380

(-1.17)

-3.893

(-0.57)

- - -

B2C × SC_EFFE - - - 1.562

(0.78)

-0.570

(-0.24)

3.695

(0.73)

CONS -37.957

(-4.02)***

-32.163

(-3.13)***

-32.230

(-2.82)***

-12.767

(-0.49)

-37.791

(-1.27)

12.258

(0.39)

Controls included YES YES YES YES YES YES


Observations 2166 2166 2166 430 430 430 Adjusted R2 0.63 0.57 0.56 0.28 0.30 0.11



Performance 157

Regarding natural versus non-natural affiliation, this chapter identifies that the

sectoral environment of natural sectors strengthens the positive relationship between

the presence of a sustainability committee and sustainability performance, as presented

by the first three columns in the Panel A of Table 4-13. The sectoral environment

strengthens the positive relationship between sustainability committee effectiveness

and environmental performance, as presented by the fifth column in the Panel A of

Table 4-13. Regarding B2C versus other affiliation, this chapter finds that the sectoral

environment of B2C sectors affects neither the committee presence nor the committee

effectiveness, as shown by Panel B of Table 4-13. In the following section, the way in

which the sample period influences the findings regarding H4a and H4b is analysed.

4.5.10 Robustness Test Seven – Time Stability

Although Australia retained a voluntary attitude towards corporate sustainability

during the sample period, it is reasonable to argue that relevant practices have changed

within that period. As discussed in Chapter 1, awareness of corporate sustainability

increased, and available guidance about sustainability increased during the 15-year

sample period. Therefore, it is possible that findings regarding H4a and H4b may

change over time. This test selects the first five years (2002 – 2006) and the last five

years (2012 – 2016) to examine time stability. Observations from the first five years

are coded as zero, and observations of the last five years are coded as one. Findings

are presented in Table 4-14. As shown in Table 4-14, I did not find that the sample

period affects the findings regarding H4a and H4b. This chapter also re-runs the main

analyses with a sub-sample from 2010 to 2016 that consists of about 75% of data of

the presence of a sustainability committee and 70% of data of sustainability committee

effectiveness, and the findings remain largely unchanged. This chapter is concluded in

following section.


Table 4-14 Time Stability This table presents the results regarding whether time affects the relationship between sustainability performance and the presence of a sustainability committee. This chapter

selects the first five years (2002 – 2006) and the last five years (2012 – 2016) to test time stability. Time is coded as a dummy variable – observations of the first five years are

coded as zero, and observations of the last five years are coded as one. Other variables in this table are defined in Table 4.2.

(1) (2) (3) (4) (5) (6)


Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

SC 8.476

(0.91)

8.180

(0.74)

8.772

(1.01)

-

- -

SC_EFFE

- - - 2.369

(1.06)

4.565

(1.74)*

0.174

(0.06)

Time -17.464

(-5.09)***

-16.054

(-3.93)***

-18.874

(-4.66)***

34.985

(1.48)

61.641

(2.33)**

8.330

(0.26)

Time × SC 2.450

(0.25)

2.758

(0.49)

-0.859

(-0.10)

- - -

Time × SC_EFFE

- - - -1.318

(-0.64)

-3.382

(1.35)

0.746

(0.26)

CONS -20.707

(-1.40)

-17.639

(-1.03)

11.362

(0.53)

25.995

(0.61)

42.560

(0.84)

9.431

(0.19) Controls YES YES YES YES YES YES

Year FE NO NO NO NO NO NO


Observations 2166 2166 2166 430 430 430

Adjusted R2 0.53 0.46 0.48 0.06 0.02 0.26



Performance 159

4.5.11 Robustness Test Eight – Inclusion of Firm Age as a Control for H3 and

H4a

This chapter provides additional assurance that the findings of H3 and H4a are

not caused by excluding firm age (lnAGE) as a control. I re-estimate Equation (1) to

include firm age (lnAGE)as a control. As Table 4-15 shows, the findings of H3 and

H4a remain qualitatively unchanged.59

Table 4-15 Inclusion of Firm Age as a Control for H3 and H4a This table presents the results from including firm age (lnAGE) as a control. Other variables in this

table are defined in Table 4.2.

(1) (2) (3) (4)

DV: CSP DV: CSP DV: ENV DV: SOC

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

Coeff. (t-stat)

SC 6.04

(4.14)***

- 5.14

(3.03)***

6.02

(3.44)***

SC_NO -

6.15

(4.44)***

- -

YEAR_REPORT

4.12

(4.95)***

4.14

(5.02)***

4.77

(5.11)***

3.41

(3.57) ***

lnAGE 3.50

(3.69) ***

3.46

(3.65)***

3.57

(3.12)***

2.80

(2.38) **

Constant and other Controls included YES YES YES YES

Firm FE YES YES YES YES

Year FE YES YES YES YES Industry FE YES YES YES YES

Observations 1376 1376 1376 1376 Adjusted R-square 0.64 0.65 0.60 0.54


59 I appreciate this suggestion from the thesis reviewer.


4.6 DISCUSSION AND CONCLUSION

As discussed in the introduction, Chapter 4 aims to analyse how the presence of

a sustainability committee and the experience of sustainability disclosure are related

to performance. By examining 2,166 firm-year observations (2002 – 2016), Chapter 4

reveals a positive relationship between the presence of a committee and performance,

and a positive relationship between the experience of disclosure and performance.

Thus, H3 is not rejected, and H4a is rejected. Examining 430 firm-year observations

about committees (2002 – 2016), this chapter finds a positive relationship between

sustainability committee effectiveness and environmental performance. Thus, H4b is

partially rejected, that is sustainability committee effectiveness is not associated with

sustainability performance as a whole. Among the four components of sustainability

committee effectiveness, authority and resources are found to be significantly related

to environmental performance. Increased resources and greater authority granted to

the sustainability committee improves sustainability performance.

As endogeneity may affect the findings in relation to H3 and H4a, the PSM and

dynamic GMM methods are used and indicate that endogeneity does not distort the

findings. In terms of the sectoral environment, sustainability committees formed by

firms in the natural sectors function better. Findings are reinforced by use of alternative

performance measurement and stable over the sample period. The conclusions reached

in this chapter are consistent with prior literature, including Peters and Romi (2014,

2015) and Dixon-Fowler et al. (2017). Chapter 4 gives insights into how sustainability

can be improved through utilising governance structures, such as board subcommittees

(Jain & Jamali, 2016) and how experience of sustainability disclosure relates to

sustainability performance. Extending Dixon-Fowler et al. (2017), Peters and Romi

(2014, 2015), Rodrigue et al. (2013) and Rankin et al. (2011), this chapter also includes

multiple characteristics of the sustainability committee in its research design.

From the theoretical perspective, the findings about H3 – a positive relationship

between firms’ experience of disclosure and sustainability performance – consist with

the arguments derived from institutional theory: firms’ experience of disclosure would

encourage firms’ sustainability practices. Findings of H4a substantiate the arguments

derived from stewardship theory that the presence of a sustainability committee is

positively related to sustainability performance, rather than the committee existing

merely as a symbol. Findings concerning H4b consist with the explanation of (audit)


Performance 161

committee effectiveness proposed by DeZoort et al. (2002) and resources dependency

theory: who sit on sustainability committees and how members are organized matter.

In terms of practical implications, I revealed two feasible avenues for improving

sustainability performance, namely the firms’ experience of sustainability disclosure

and the presence of a sustainability committee. It is noteworthy that social issues seem

to be relatively ignored by sustainability committees. Regulators and market operators

in Australia should recognize that sustainability committees as operationalized do not

include social issues in their agenda.

Findings of this chapter also suggest two future directions. First, future studies

may examine if not by the presence of a sustainability committee, which governance

mechanisms could be used to better manage social impact of corporate activities, and

why social issues are generally omitted from the agenda of a sustainability committee.

Qualitative research methods, including interview, observation, and content analysis,

are expected to shed light on the aforementioned research themes. Secondly, future

studies may examine why two components, namely composition and diligence, are not

active in sustainability performance. Again, qualitative research approaches, including

interview, may help researchers in this regard. Taken together, following Rodrigue et

al. (2013), I encourage future researchers to use qualitative or mixed methods to cast

light on their interested phenomena.

This chapter has three main limitations. First, findings in the Australian context

are generalizable to the extent of consistency of regulatory framework. Future studies

are encouraged to investigate this relationship in countries where the socio-political

environment of sustainability practice is different from the environment in Australia.

Secondly, Chapter 4 uses quantitative methods in the research design. Thus, there is a

limitation in my sample selection. For example, my sample does not include small-to-

medium enterprises in Australia. Thirdly, while I use different sources to triangulate

the data about the committee members, there still could be errors and omissions in this

set of data. In the following chapter, this thesis is concluded.

Chapter 5: Conclusions 163

Chapter 5: Conclusions

Chapter 5 concludes this thesis by summarizing the previous four chapters. In

Section 5.1, this chapter discusses how Chapter 3 and 4 collectively answer the four

research questions outlined in Chapter 1. In Section 5.2, the findings of Chapter 3 and

4 are summarized to depict a more comprehensive picture of corporate sustainability

in Australia. In Section 5.3, contributions and practical implications of this thesis are

explained. In Section 5.4, limitations of this thesis and avenues for future research are

discussed.

5.1 SUMMARY OF THIS THESIS

There are three motivations in here. First, the current regulatory environment for

voluntary corporate sustainability disclosure in Australia is under pressure to become

a more structured framework. Therefore, more understanding about current corporate

sustainability practices would actively contribute to relating policy discussion. Second,

richer knowledge about corporate sustainability would be beneficial to stakeholders,

as corporate sustainability continues to grow in importance. Third, there are many

research opportunities identified in prior literature awaiting exploration. Accordingly,

I examine three themes, namely sustainability performance, sustainability disclosure

and the effectiveness of sustainability committee. Chapter 3 and 4 focus on Australia,

examine public firms’ practices, and form part of a larger research agenda – corporate

sustainability. Chapters 3 and 4 take into account different theories (signalling theory,

institutional theory, stewardship theory and resource dependence theory) and develop

five hypotheses to explore four research questions. The five hypotheses are restated

below.

H1 There is no relationship between sustainability performance and six textual

characteristics of sustainability disclosure: a) amount of information (measured in

number of words), b) amount of quantitative information (measured by the Diction

7), c) amount of environmental impact information (measured in number of words),

d) tone of optimism (measured by the Diction 7), e) tone of certainty (measured by

the Diction 7), and f) tone of clarity (measured by the Diction 7).

164 Chapter 5: Conclusions

H2 Readability of sustainability disclosure is positively related to sustainability

performance.

H3 There is a positive relationship between a firm’s sustainability performance

and its experience of sustainability disclosure.

H4a There is no relationship between the presence of a sustainability

committee and sustainability performance.

H4b There is a positive relationship between sustainability committee

effectiveness and sustainability performance.


Figure 5-1 Connections between Chapter 3 and 4


Chapter 3 uses institutional theory and signalling theory to develop H1 and H2

about the relationship between textual characteristics of sustainability disclosure and

sustainability performance. Considering the literature about committee effectiveness,

Chapter 4 uses stewardship theory and resource dependency theory to come up with

three hypotheses about experience of disclosure, the presence and effectiveness of a

sustainability committee and sustainability performance (H3, H4a and H4b). Clearly,

the mature literature about corporate sustainability reviewed in Chapter 2 lays a solid

foundation for Chapter 3 and 4 in the hypothesis development and research design.

Following prior literature, this thesis uses panel regression to examine whether

empirical data substantiates its hypotheses. Sustainability disclosure information was

manually gathered from two sources: (1) annual reports, (2) standalone sustainability

reports. If there were no standalone reports, annual reports were examined to extract

the information that is relevant to sustainability. In total, 2,639 pieces of sustainability

disclosure were manually collected. Synthesizing empirical data from the Bloomberg,

the Asset4 and annual reports, the thesis identified 430 firm-year observations of

sustainability committees. It is noteworthy the details about sustainability committees

were all manually collected from annual reports and online sources, as no third-party

databases are available. ESG60 scores provided by the Asset4 are used to measure

sustainability performance. The sample period is from 2002 to 2016. Findings of the

thesis are summarized in following section.

5.2 SUMMARY OF THE FINDINGS

Chapter 3 examines how textual characteristics of sustainability disclosure are

related to sustainability performance. The textual characteristics examined in Chapter

3 include the amount of total disclosure, amount of quantitative information, amount

of environmental-impact information, readability, tone of optimism, tone of clarity and

tone of certainty. Findings about H1 and H2 are as follows.

Good performers report more sustainability disclosure, quantitative information

and information about their environmental impact. They present in optimistic, certain

and clear tones and communicate in a more readable way. Whether information is

disclosed in annual report or standalone report affects relationships between textual

60 ESG represents environmental, social and governance.


characteristics and performance. Different sectoral environments affected how sample

firms prepared sustainability disclosure. Different sample periods also affect relations

between textual characteristics and performance. Findings of Chapter 3 are robust to

alternative measurement based on performance and alternative model specification.

Textual characteristics in one period do not relate to sustainability performance in a

following period, and vice versa.

Chapter 4 examines how the sustainability committee and firms’ experience

regarding sustainability disclosure relate to sustainability performance (i.e. H3, 4a and

4b). To be specific, Chapter 4 examines the sustainability committee from two aspects,

presence and committee effectiveness, and operationalizes experience of sustainability

disclosure as years of disclosure. Findings about H3, H4a and H4b are as follows.

Regarding the firms’ disclosure experience (H3), there is a positive relationship

between the experience of sustainability disclosure and sustainability performance. It

is argued that the findings about H3 consist with institutional theory. Regarding the

presence of a sustainability committee (H4a), Chapter 4 found a positive relationship

between sustainability committee presence and sustainability performance. Extending

this testing, I substitute the presence of a sustainability committee with the number of

sustainability committees to provide more evidence about this hypothesis. Regarding

sustainability committee effectiveness, a positive relationship between environmental

performance (one pillar of sustainability performance) and it is found; however, it is

not related to sustainability performance as a whole. Among the four components of

sustainability committee effectiveness, authority and resources significantly relate to

environmental performance. Increased resources and greater authority granted to the

sustainability committee improves sustainability performance. Four sets of robustness

tests are performed. First, the propensity score matching and the dynamic generalized

method-of-moments methods are used and indicate that endogeneity does not distort

the findings. Secondly, sustainability committees established by firms in the natural

sectors function better. Thirdly, discriminating the sample by the first five years and

the last five years, findings remain stable. Fourthly, findings are reinforced by analysis

of sub-categories of sustainability performance.

Table 5-1 summarizes the hypotheses and findings. Table 5-2 shows this thesis’s

conclusions and implications. In the following section, the contributions and practical

implications are elaborated.


5.3 CONTRIBUTIONS AND PRACTICAL IMPLICATIONS

This thesis contributes to prior literature in at least two ways. First, it enriches

the knowledge about sustainability disclosure from linguistic perspectives. Secondly,

it contributes to the growing field, namely sustainability committee that is expected to

be an opportunity to better integrate sustainability into corporate governance.

Regarding theoretical contributions, this thesis considers several theories. First,

as prior studies suggest, the first research question relates to the explanatory power of

both signalling theory and institutional theory. Differing from prior literature, Chapter

3 explores an alternative context, namely various textual characteristics of disclosure.

Chapter 3 also introduces Bloomfield’s (2002, 2008) incomplete revelation hypothesis

into corporate sustainability literature. As Section 3.5 suggests, findings with regard

to the first research question lend support to the explanatory power of signalling theory

and incomplete revelation hypothesis – firms use sustainability disclosures to signal/

communicate their sustainability performance, rather managing institutional pressures

on sustainability. Secondly, the second research question is related to the explanatory

power of institutional theory. As Section 4.5 reports, findings with regard to the second

research question support institutional theory – more engagement in disclosure would

improve performance. Thirdly, the third research question is relevant to stewardship

theory and resource dependency theory in the context of sustainability committees. As

Section 4.5 suggests, findings of the third question support the explanatory power of

stewardship theory – sustainability committees are formed to improve sustainability

performance, rather only delivering symbolic meanings; the findings also lend support

to resource dependency theory – sustainability committee effectiveness affects to what

extent sustainability committees contribute to firms’ sustainability performance.

Regarding practical implications, this thesis finds interesting patterns. First, if

greenwashing is defined as the intersection of two behaviours: negative performance

and positive disclosure (Delmas & Burbano, 2011), the findings of Chapter 3 do not

support the presence of greenwashing in sustainability disclosure. Thus, this suggests

the voluntary-disclosure status in Australia does not induce this undue phenomenon or

rhetorical strategy of concern to many stakeholders. Second, readability of

sustainability disclosure would be considered by regulators, as Chapter 3 reveals that

those who read sustainability disclosure information can be misled and distracted by

how firms with worse performance present their data. Taken together, instead of


mandating sustainability disclosure in general, regulators can pay closer attention to

readability of sustainability disclosure. Third, as the presence of a sustainability

committee and the experience of disclosure demonstrably contribute to sustainability

performance, I urge regulators to encourage firms to form their own sustainability

committee(s) and to actively engage in sustainability disclosure. Table 5-1 summarizes

this thesis’s hypotheses and findings. I summarize conclusions as well as implications

in Table 5-2. Limitations and future research of this thesis are discussed in following

section.


Table 5-1 Summary of Research Questions, Hypotheses and Findings RQ Hypothesis Direction Finding

RQ1: Whether and how is an

Australian firm’s sustainability

performance associated with its

sustainability disclosure?

H1 There is no relationship between sustainability performance and six textual characteristics of

sustainability disclosure: a) amount of information (measured in number of words), b) amount of

quantitative information (measured by the Diction 7), c) amount of environmental impact

information (measured in number of words), d) tone of optimism (measured by the Diction 7), e)

tone of certainty (measured by the Diction 7), and f) tone of clarity (measured by the Diction 7).

0 +

H2 Readability of sustainability disclosure is positively related to sustainability performance. + +

RQ2: How is experience of

sustainability disclosure related to


H3 There is a positive relationship between a firm’s sustainability performance and its experience of

sustainability disclosure.

+ +

RQ3a: How is the presence of a

sustainability committee related to


H4a There is no relationship between the presence of a sustainability committee and sustainability

performance.

0 +

RQ3b: How is the effectiveness of the

sustainability committee related to


H4b There is a positive relationship between sustainability committee effectiveness and sustainability

performance.

+ +/0


Table 5-2 Summary of Research Conclusions and Implications RQ Theoretical Assumption Previous Findings Conclusions based on

this Thesis

Implications for

Theory

Implications for Practice Implications for

Further Research

RQ1: Whether and

how is an

Australian firm’s

sustainability

performance

associated with its

sustainability

disclosure?

Signalling theory argues

that firms with better

performance use

sustainability disclosure

to distinguish themselves;

institutional theory

suggests that poor

performers disclose

sustainability information

in a way that disguises

their poor performance and misleads

stakeholders.

Prior literature

reaches mixed

findings. It is

noteworthy that a

number of studies

reveal poor

performers report

more sustainability

disclosure and

present in an

optimistic and certain way.

Good performers report

more sustainability

disclosure, quantitative

information and

information about their

environmental impact.

They present in an

optimistic, certain and

clear way and also

communicate in a more

readable way.

Supports

• Signalling

theory

• Incomplete revelation

hypothesis.

The voluntary-disclosure

status in Australia does

not induce a combination

of negative performance

with positive disclosure,

an undue phenomenon

concerned by many

stakeholders. Poor

performers are likely to

present their disclosure in

a less readable way, potentially leading to

biased decisions.

• To investigate

settings where the

environment of

sustainability

practice is

different from that

in Australia.

• To explore

whether good

performers unduly

positively present.

RQ2: How is

experience of

sustainability disclosure related

to sustainability

performance?

Institutional theory

conjectures that

experience of disclosure can raise awareness of

sustainability practice

within firms and equip

decision makers with the

knowledge about how to

practice sustainability,

leading to better

performance.

N/A Firms that have engaged

in sustainability

disclosure for longer durations deliver better

performance.

Supports

• Institutional

theory

Regulators and market

operators in Australia

could encourage firms to engage in sustainability

disclosure, leading to

better sustainability

performance.

• To reveal more

details about the

effects of sustainability

disclosure on how

firms practice

sustainability

performance.


RQ Theoretical Assumption Previous

Findings

Conclusions based on

this Thesis

Implications for

Theory

Implications for

Practice

Implications for

Further Research

RQ3a: How is the

presence of a

sustainability

committee related

to sustainability

performance?

Stewardship theory argues that

board committees are formed to

better assist directors and senior

management in monitoring and

strategic decision-making, and

for the directors to provide good

stewardship to the resources

entrusted to them. But

greenwashing suggests that a

sustainability committee is

formed to maintain legitimacy and improve reputation, not

necessarily relating to

sustainability performance.

Prior literature

reaches mixed

findings.

The presence of a

sustainability

committee is positively

related to sustainability

performance.

Supports

• Stewardship

theory.

A sustainability

committee seems to

be a governance

structure that can

improve

sustainability

performance.

• To explore this

research question in

countries where the

environment of

sustainability

practice is different

from that in

Australia.

RQ3b: How is the

effectiveness of the

sustainability

committee related

to sustainability

performance?

Resources dependency theory

argues that a sustainability

committee is deemed as the nexus

between a firm and its essential

resources, which the firm requires

to improve sustainability

performance.

Prior literature

suggests that

committee

effectiveness

relates to how the

board committee

functions.

Sustainability

committee

effectiveness is

positively related to

environmental

performance; among

pillars of committee

effectiveness, resources and authority are found

to be significant.

Supports

• Resources dependency

theory.

Regulators and

market operators in

Australia could

encourage firms to

set up their own

sustainability

committees and

maintain committee

effectiveness.

• To investigate if not

by sustainability

committee, which

governance

mechanisms can be

used to better

manage social

impact of corporate activities.

• To examine why

social issues are less

considered by

sustainability

committee.


5.4 LIMITATIONS AND OPPORTUNITIES FOR FUTURE RESEARCH

Findings rendered by this thesis shed light on future research opportunities. First,

my findings in the Australian context are generalizable to the extent of consistency of

regulatory framework. Future studies are encouraged to investigate my research topics

in countries where the socio-political environment of sustainability practice is different

from that in Australia. For example, future studies may investigate whether mandatory

sustainability disclosure influences the relationship between what are disclosed and

what are performed (refer to Chapter 3). Secondly, a dictionary-based approach is used

to measure seven textual characteristics. Following Loughran and McDonald (2016),

I encourage future studies to use alternative methods (e.g. machine learning) to explore

these textual characteristics. Thirdly, this thesis reveals that sustainability disclosure

does not hide poor performance, yet it is uncertain whether firms boast performance

in sustainability disclosure at a level that misleads users of disclosure. In this context,

boast refers to firms overly positively present their sustainability performance. While

this is not within the scope of this thesis, future studies are encouraged to understand

how disclosure users react to the textual characteristics concerned by different research

methods. For example, doing experiments with users of sustainability disclosure can

shed light on how textual characteristics of disclosure affect their perceptions to firms’

sustainability performance. Fourthly, it is reasonable to argue that qualitative methods

can greatly extend the findings of this thesis. Future studies may explore if not by

sustainability committee, which governance mechanisms could be used to better

manage social impact of corporate activities, and why social issues are generally

omitted from the agenda of a sustainability committee. Following Higgins et al.

(2015), I suggest that qualitative methods can open up novel theoretical explanations

regarding corporate sustainability practices in Australia. Fifthly, being limited by the

data sources, my sample does not include small-to-medium enterprises in Australia. I

encourage future studies to investigate corporate sustainability practices of small-to-

medium enterprises, a very promising research direction.

Appendices 175

Appendices

Appendix A

Details about Asset4’s Scores

As Figure 3-1 and Figure 3-2 present, Asset4’s scores have four pillars, namely

environmental scores/ performance, social scores/ performance, corporate governance

scores/ performance and economic scores/ performance. Details about each pillar are

tabulated below. It is argued that environmental scores/ performance and social scores/

performance measure a firm’s sustainability performance but not a firm’s disclosure,

and corporate governance scores/ performance does not measure a firm’s sustainability

performance. The information tabulated below is directly replicated from Asset4 ESG

Data Glossary.61

61 This Glossary is downloaded from

https://uvalibraryfeb.files.wordpress.com/.../asset4_esg_data_glossary_april2013.xlsx (access date is

24 July 2019).

176 Appendices

Sub-categories Asset4

Code

Description

Emission Reduction ENER The emission reduction category measures a firm’s management commitment and effectiveness towards reducing environmental

emission in the production and operational processes. It reflects a firm’s capacity to reduce air emissions (greenhouse gases, F-

gases, ozone-depleting substances, NOx and SOx, etc.), waste, hazardous waste, water discharges, spills or its impacts on

biodiversity and to partner with environmental organisations to reduce the environmental impact of the firm in the local or

broader community.

Product Innovation ENPI The product innovation category measures a firm’s management commitment and effectiveness towards supporting the research

and development of eco-efficient products or services. It reflects a firm’s capacity to reduce the environmental costs and burdens

for its customers, and thereby creating new market opportunities through new environmental technologies and processes or eco-

designed, dematerialized products with extended durability.

Resource Reduction ENRR The resource reduction category measures a firm’s management commitment and effectiveness towards achieving an efficient

use of natural resources in the production process. It reflects a firm’s capacity to reduce the use of materials, energy or water,

and to find more eco-efficient solutions by improving supply chain management.

Customer /Product

Responsibility

SOPR The customer/product responsibility category measures a firm’s management commitment and effectiveness towards creating

value-added products and services upholding the customer’s security. It reflects a firm’s capacity to maintain its license to

operate by producing quality goods and services integrating the customer’s health and safety, and preserving its integrity and

privacy also through accurate product information and labelling.

Society /Community SOCO The society/community category measures a firm’s management commitment and effectiveness towards maintaining the firm’s

reputation within the general community (local, national and global). It reflects a firm’s capacity to maintain its license to

operate by being a good citizen (donations of cash, goods or staff time, etc.), protecting public health (avoidance of industrial

accidents, etc.) and respecting business ethics (avoiding bribery and corruption, etc.).

Society /Human Rights SOHR The society/human rights category measures a firm’s management commitment and effectiveness towards respecting the

fundamental human rights conventions. It reflects a firm’s capacity to maintain its license to operate by guaranteeing the

freedom of association and excluding child, forced or compulsory labour.

Workforce /Diversity and

Opportunity

SODO The workforce/diversity and opportunity category measures a firm’s management commitment and effectiveness towards

maintaining diversity and equal opportunities in its workforce. It reflects a firm’s capacity to increase its workforce loyalty and

productivity by promoting an effective life-work balance, a family friendly environment and equal opportunities regardless of

gender, age, ethnicity, religion or sexual orientation.

Appendices 177

Workforce /Employment

Quality

SOEQ The workforce/employment quality category measures a firm’s management commitment and effectiveness towards providing

high-quality employment benefits and job conditions. It reflects a firm’s capacity to increase its workforce loyalty and

productivity by distributing rewarding and fair employment benefits, and by focusing on long-term employment growth and

stability by promoting from within, avoiding lay-offs and maintaining relations with trade unions.

Workforce /Health & Safety SOHS The workforce/health & safety category measures a firm’s management commitment and effectiveness towards providing a

healthy and safe workplace. It reflects a firm’s capacity to increase its workforce loyalty and productivity by integrating into its

day-to-day operations a concern for the physical and mental health, well-being and stress level of all employees.

Workforce /Training and

Development

SOTD The workforce/training and development category measures a firm’s management commitment and effectiveness towards

providing training and development (education) for its workforce. It reflects a firm’s capacity to increase its intellectual capital,

workforce loyalty and productivity by developing the workforce’s skills, competences, employability and careers in an

entrepreneurial environment.

Margins /Performance ECPE The margins/performance category measures a firm’s management commitment and effectiveness towards maintaining a stable

cost base. It reflects a firm's capacity to improve its margins by increasing its performance (production process innovations) or

by maintaining a loyal and productive employee and supplier base.

Profitability /Shareholder

Loyalty

ECSL The profitability/shareholders loyalty category measures a firm's management commitment and effectiveness towards generating

a high return on investments. It reflects a firm's capacity to maintain a loyal shareholder base by generating sustainable returns

through a focused and transparent long-term communications strategy with its shareholders.

Revenue /Client Loyalty ECCL The revenue/client loyalty category measures a firm’s management commitment and effectiveness towards generating

sustainable and long-term revenue growth. It reflects a firm’s capacity to grow, while maintaining a loyal client base through

satisfaction programmes and avoiding anti-competitive behaviours and price fixing.

Board of Directors/Board

Functions

CGBF The board of directors/board functions category measures a firm’s management commitment and effectiveness towards

following best practice corporate governance principles related to board activities and functions. It reflects a firm’s capacity to

have an effective board by setting up the essential board committees with allocated tasks and responsibilities.

Board of Directors/Board

Structure

CGBS The board of directors/board structure category measures a firm’s management commitment and effectiveness towards following

best practice corporate governance principles related to a well balanced membership of the board. It reflects a firm’s capacity to

ensure a critical exchange of ideas and an independent decision-making process through an experienced, diverse and

independent board.

Board of

Directors/Compensation

Policy

CGCP The board of directors/compensation policy category measures a firm’s management commitment and effectiveness towards

following best practice corporate governance principles related to competitive and proportionate management compensation. It

178 Appendices

reflects a firm’s capacity to attract and retain executives and board members with the necessary skills by linking their

compensation to individual or firm-wide financial or extra-financial targets.

Integration/Vision and

Strategy

CGVS The integration/vision and strategy category measures a firm’s management commitment and effectiveness towards the creation

of an overarching vision and strategy integrating financial and extra-financial aspects. It reflects a firm’s capacity to

convincingly show and communicate that it integrates the economic (financial), social and environmental dimensions into its

day-to-day decision-making processes.

Shareholders /Shareholder

Rights

CGSR The shareholders/shareholder rights category measures a firm’s management commitment and effectiveness towards following

best practice corporate governance principles related to a shareholder policy and equal treatment of shareholders. It reflects a

firm’s capacity to be attractive to minority shareholders by ensuring them equal rights and privileges and by limiting the use of

anti-takeover devices.

Appendices 179

Appendix B

Example of Sustainability Disclosure – Input to Diction 7

I use the sustainability disclosure from Independence Group NL (IGO) in 2016

as an example. IGO is an Australian firm listed on the Australian Securities Exchange,

is a diversified mining, development and exploration firm, and also is a constituent of

ASX 200. IGO began to publish standalone sustainability report in 2015. As IGO’s

operation sites are within Australia, it is a typical mining firm in Australia. The picture

below demonstrates what an input to Diction 7 looks like.

180 Appendices

Appendices 181

Appendix C

Outputs from Diction 7

I show the outputs from Diction 7 corresponding to the sustainability disclosure

of IGO in 2016 (see the Appendix B) in this appendix. The outputs from Diction 7

consist of four panels: summary, processed text, counts and variables. The four panels

can be viewed in File Report Viewer. Statistics in the summary panel are used for my

data analysis. Certainty, defined as “language indicating resoluteness, inflexibility, and

completeness and a tendency to speak ex cathedra” (Digitext, 2015, p. 6), consists of

eight calculated variables – [Tenacity + Levelling Terms + Collectives + Insistence] −

[Numerical Terms + Ambivalence + Self Reference + Variety]. Optimism, which is

defined as “language endorsing some person, group, concept or event or highlighting

their positive entailments” (Digitext, 2015, p. 7), consists of six calculated variables –

[Praise + Satisfaction + Inspiration] − [Blame + Hardship + Denial]. More information

about these calculated variables are also included in here.

182 Appendices

Appendices 183

184 Appendices

Appendices 185

186 Appendices

(Digitext, 2015, p. 6)

Appendices 187

(Digitext, 2015, p. 7)

188 Appendices

Appendix D

Principal Component Analysis of Four Readability Indices

Chapter 3 synthesizes four readability indices, including Flesch Reading Ease

Score (FRE), Flesch-Kincaid Grade Level Score (FKGL), Coleman-Liau Index (CLI)

and Simple measure of Gobbledygook (SMOG). The greater FRE score relates to more

readable disclosure, the greater FKGL score associates with less readable disclosure,

the greater CLI means less readable disclosure, and the greater SMOG score indicates

less readable disclosure. To make interpretation easier and consistent, I multiply minus

one with the FKGL, CLI and SMOG to ensure that the greater a score is, a sentence is

more readable.

Eigenvalue Loading

Comp1 2.618 0.654

Comp2 0.969 0.242

Comp3 0.398 0.100

Comp4 0.016 0.004

Appendices 189

Appendix E

Example of a Sustainability Committee

I use the sustainability committee from Crown Resorts Limited in 2015 as an

example. As a gaming and entertainment firm, Crown Resorts Limited is a constituent

of ASX 200.

190 Appendices

Appendix F

Example of How Information about Committee Members is Collected

I use Helen Coonan, the chair of Corporate Social Responsibility Committee of

Crown Resorts Limited in 2015 as an example to show how I collect information about

each committee member in Chapter 4. The 2015 Annual Report of Crown Resorts

Limited provided much information about Helen Coonan. The first picture is selected

from Page 40 of the 2015 Annual Report, the second picture is selected from Page 53,

the third picture is selected from Page 54, and the fourth picture is selected from Page

58.

Appendices 191

192 Appendices

Appendices 193

The 2015 Annual Report provided much information about Helen Coonan. As

the prior work experience of Helen Coonan has been not comprehensively reported in

the firm’s annual report, I have to use other external sources to search for evidence of

her experience and expertise. I used Bloomberg to search Helen Coonan, as presented

below,62 as the information provided by Bloomberg enriches the 2015 Annual Report.

62 The webpage can be found on

https://www.bloomberg.com/research/stocks/people/person.asp?personId=143871771&privcapId=206

08200 (access date is 16 June 2019).

194 Appendices

Appendices 195

I also used Google to collect more information about Helen Coonan to evaluate

the level of her expertise, justifying that Helen Coonan is a sustainability expert. The

below picture is a piece of information linked by Google.63

Using the 2015 Annual Report and external sources, I collected comprehensive

information about Helen Coonan regarding the sustainability committee effectiveness

measure. There are two caveats to readers. First, how to differentiate higher education

qualifications from other qualifications needs to be better clarified. For example, Helen

Coonan has been awarded two higher education qualifications (i.e. B.A. and L.L.B.).

While Helen Coonan also obtained other professional qualifications (e.g. barrister and

solicitor in Queensland), these two qualifications are not counted as higher education

63 The webpage can be found on https://cew.org.au/members/helen-coonan/ (access date is 16 June

2019).

196 Appendices

qualifications. Secondly, how to determine sustainability expert needs to be clarified.

For example, Helen Coonan is classified as a sustainability expert, as she has very rich

experience in various philanthropic organizations.

Appendices 197

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CORPORATE SUSTAINABILITY IN AUSTRALIA ...Corporate Sustainability in Australia: Performance, Disclosure and Governance iii a firm has disclosed sustainability information, and it investigates