Qiu Y

Does Corporate Environmental and
Social Responsibility Matter for Firm

Performance in the UK?
Submitted by
Yan Qiu
to
the University of Exeter
as a thesis for the degree of
Doctor of Philosophy in Accountancy
June 2013
This thesis is available for Library use on the understanding that it is copyright
material and that no quotation from the thesis may be published without proper
acknowledgement.
I certify that all material in this thesis which is not my own work has been
identified and that no material has previously been submitted and approved for
the award of a degree by this or any other University.
.........................................................................................
1
Abstract
In this thesis first, I investigate the link between firms environmental and social
disclosures (ESD) and their profitability, as well as establish the direction of
causality between the two. Second, I examine the association between ESD
with firms market value, employee productivity and carbon eco-efficiency
respectively. Finally, I examine the relations among firms CSR related board
attributes, CSR strategy and their environmental and social performance (ESP).
The first empirical chapter shows that firms with higher profitability tend to
provide more ESD, which is consistent with the accounting- and economics-
based arguments that ESD involve a real as well as an opportunity cost that
more profitable firms with higher slack resources are better able to afford.
The results regarding market value analysis show that overall ESD, in particular
social disclosures matter to investors. Investors appear to be placing higher
values on firms seen to be behaving in a socially responsible manner.
Presumably, more responsible behaviour in the social arena reflected in higher
disclosure helps to mitigate the information asymmetry, and hence the
perceived social risk of the firm. Investors thus place higher values on such
firms. The evidence on the link between firms ESD and their ESP measures
supports this explanation. Specifically, I find that more social (environmental)
disclosure in prior year reflects better social (environmental) performance as
captured by higher employee productivity (more carbon eco-efficiency) in the
current year.
The results of the final empirical chapter show that boards having certain CSR-
conducive attributes, particularly independent directors, women directors, and
directors with financial expertise on the audit committee, are more likely to
develop a multi-pronged CSR strategy which in turn translates into superior
environmental and social performance. Furthermore, I find that firms with better
ESP tend to further strengthen their board CSR orientation. In other words, the
analysis suggests the presence of a positive and cyclical link between CSR
orientation, firm CSR strategy, and firm environmental and social performance.
2
Acknowledgements
I am sincerely and heartily grateful to my supervisors, Dr. Amama Shaukat and

Professor Kevin McMeeking, for their support, feedback, constructive criticism
and guidance throughout my Ph.D. I am sure it would not have been possible
without their help.
I am also deeply indebted to Professor Richard Macve, Professor David

Gwilliam and Professor Jo Horton, whose guidance, encouragement and
support made this thesis possible.
I would like to express my gratitude to the academic and supporting staff, and
friends in the Business School, who have kindly provided support and friendship
that I needed throughout these years.
Finally, my great and sincere thanks go to my parents, for their endless love
and support that has constantly encouraged me till the end of this long journey.
Besides, I wish to thank my husband Xin, a true and great supporter who has
unconditionally loved me during my good and bad times.
3
Table of Contents
Abstract..2
Acknowdgements.3
Chapter 1: Introduction .......................................................................................... 10
1.1 Background and motivation ..................................................................... 10
1.2 Research aim and objectives .................................................................. 13
1.3 Structure of the thesis ............................................................................. 13
Chapter 2: Environmental and social responsibility: theoretical and
regulatory frameworks ........................................................................................... 16
2.1 Introduction ............................................................................................. 16
2.1.1 Definitions and background .............................................................. 17
2.1.2 Difference and linkage between environmental and social disclosures
(ESD) and environmental and social performance (ESP) .......................... 18
2.2 Voluntary ESD......................................................................................... 20
2.2.1 General voluntary disclosure theory.................................................. 20
2.2.2 Theoretical frameworks underlying ESD ........................................... 23
2.2.2.1 Legitimacy theory ....................................................................... 24
2.2.2.2 Political economy theory ............................................................. 26
2.2.2.3 Agency theory ............................................................................. 27
2.2.3 Drivers of ESD .................................................................................. 29
2.2.4 ESD challenges and recommendations ............................................ 30
2.3 ESP ......................................................................................................... 31
2.3.1 Theoretical frameworks underlying ESP ........................................... 31
2.3.1.1 Stakeholder theory ..................................................................... 31
2.3.1.2 Resource based view of the firm (RBV) ...................................... 34
2.3.1.3 Resource dependence theory (RDT) .......................................... 35
2.3.2 Importance of ESP ............................................................................ 37
2.4 Regulatory frameworks and policy guidelines of environmental and social
responsibility ................................................................................................. 40
2.4.1 International policy guidelines ........................................................... 41
2.4.1.1 The Institute of Social and Ethical Accountability (ISEA)
AA1000AS .............................................................................................. 41
2.4.1.2 The UN Global Compact (UNGC) ............................................... 41
2.4.1.3 Global Reporting Initiatives Sustainability Reporting Guidelines 42
4
2.4.2 Regulatory frameworks in the UK ..................................................... 45
2.4.2.1 Companies Act 2006 and Pension Funds Amendment Act 2001 45
2.4.2.2 Climate Change Act 2008 ........................................................... 46
2.4.3 Other frameworks and policy guidelines in the UK............................ 47
2.4.3.1 Carbon Disclosure Project (CDP) ............................................... 47
2.4.3.2 Department for Environment Food and Rural Affairs (DEFRA) .. 47
2.4.3.3 Association of Chartered Certified Accountants (ACCA) ............ 48
2.4.4 Stock Exchange related and government reporting requirements .... 48
2.5 Environmental and social responsibility measures .................................. 51
2.5.1 Development of environmental and social responsibility indices ...... 53
2.5.2 Bloomberg ESD measures ............................................................... 57
2.5.3 Carbon emission data ....................................................................... 59
2.5.4 Asset4 ESP measures ...................................................................... 60
2.6 Conclusions ............................................................................................ 62
Chapter 3: Environmental and social responsibility, corporate governance
and firm performance ............................................................................................ 64
3.1 Introduction ............................................................................................. 64
3.2 Environmental and social responsibility and firms financial performance64
3.2.1 Relations between ESP and corporate financial performance (CFP) 66
3.2.1.1 Prior studies on the ESP-CFP link .............................................. 66
3.2.1.2 Causality ..................................................................................... 73
3.2.2 Research on the link between ESP and ESD ................................... 75
3.2.3 Research on the link between ESD and CFP ................................... 80
3.3 Environmental and social responsibility and corporate governance ........ 86
3.3.1 Board attributes and firms environmental and social performance .. 87
3.3.2 Board role in leading CSR strategy ................................................... 90
3.3.3 CSR strategy and firms environmental and social performance ...... 94
3.3.4 Within-equilibrium or out-of-equilibrium phenomenon ....................... 95
3.4 Conclusions ............................................................................................ 98
Chapter 4: Environmental and social disclosures and firm profitability ........... 99
4.1 Introduction ............................................................................................. 99
4.2 Hypothesis development ....................................................................... 100
4.2.1 Profitability, slack recourses and ESD ............................................ 102
4.2.2 Firm size and ESD .......................................................................... 104
4.2.3 Firm leverage and ESD................................................................... 104
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4.2.4 Financial activities and ESD ........................................................... 105
4.2.5 Ownership structure and ESD ........................................................ 105
4.2.6 Industry specific and fixed year effects ........................................... 106
4.2.7 Media exposure and ESD ............................................................... 106
4.3 Models, methodology and variables ...................................................... 107
4.3.1 Models tested ................................................................................. 107
4.3.2 Measurement of variables ............................................................... 109
4.4 Sample and data ................................................................................... 111
4.5 Results .................................................................................................. 113
4.5.1 Descriptive and correlation statistics ............................................... 113
4.5.2 Regression analysis ........................................................................ 116
4.5.3 Robustness test .............................................................................. 120
4.6 Discussion and conclusions .................................................................. 122
Chapter 5: Environmental and social disclosures and firms market values,
employee productivity and carbon eco-efficiency ............................................ 124
5.1 Introduction ........................................................................................... 124
5.2 Hypotheses development ...................................................................... 125
5.2.1 ESD and firms market values ......................................................... 126
5.2.2 Social disclosure and employee productivity .................................. 128
5.2.3 Environmental disclosure and carbon eco-efficiency ...................... 130
5.3 Data, sample and methodology............................................................. 131
5.3.1 Sample and data ............................................................................. 131
5.3.2 Models tested and variables ........................................................... 131
5.4 Results .................................................................................................. 135
5.4.2 Regression analysis ........................................................................ 137
Chapter 6: Board attributes, CSR strategy and firms environmental and
social performance .............................................................................................. 144
6.1 Introduction ........................................................................................... 144
6.2 Theoretical model and hypotheses development .................................. 146
6.3 Variables and models ............................................................................ 148
6.3.1 Endogenous variables .................................................................... 148
6.3.2 Exogenous regressors and control variables .................................. 154
6.3.3 Models tested ................................................................................. 154
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6.4 Sample and data ................................................................................... 156
6.5 Results .................................................................................................. 157
6.5.2 Structural equation modelling results .............................................. 160
6.6 Sensitivity analyses ............................................................................... 164
6.6.1 Size effect and FTSE 100 dummy .................................................. 164
6.6.2 Analysis using alternative CSR strategy and environmental and social
measures ................................................................................................. 164
Chapter 7: Conclusions and implications .......................................................... 167
7.1 Research findings and implications ....................................................... 167
7.2 Research limitations .............................................................................. 170
7.3 Future research ..................................................................................... 170
Appendices ........................................................................................................... 172
Bibliography ......................................................................................................... 183
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List of Tables
Table 2.1 A summary of relevant frameworks .................................................. 50

Table 2.2 ESG pillars and sub-categories (2002-2010).................................... 61
Table 2.3 A break-down of governance pillar (Asset4 data fields).................... 62
Table 4.1 Number of sample companies in each sector by year .................... 112
Table 4.2 Descriptive statistics ....................................................................... 113
Table 4.3 Pair-wise correlation matrix ............................................................ 115
Table 4.4 Tobit regressions explaining ES/E/S score (Equation 4-1) ............. 116
Table 4.5 Granger causality test (Equation 4-2 and 4-3) ................................ 119
Table 5.2a Pair-wise correlation matrix for testing H1 .................................... 136
Table 5.2b Pair-wise correlation matrix for testing H2.....137
Table 5.2c Pair-wise correlation matrix for testing H3.137
Table 5.3: OLS regressions explaining market value (Equation 5-1)....138
Table 5.4 OLS regressions explaining carbon intensity and employee
productivity..140
Table 6.1 CSR vision and strategy (Definitions and pair-wise correlation
matrix)..154
Table 6.2 Number of sample companies in each sector and each year ......... 156
Table 6.4 Pair-wise correlation matrix ............................................................ 159
Table 6.5 Results of structural equation model with respect to environmental
performance (Standardized coefficients reported).......................................... 160
Table 6.6 Results of structural equation model with respect to social
performance (Standardized coefficients reported).......................................... 163
Table 6.7 Summary of structural equation modelling results (Standardized
coefficients reported) ...................................................................................... 164
Table 6.8 Results of alternative measure of CSR strategy (Standardized
coefficients reported) ...................................................................................... 165
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List of Figures
Figure 3.1: Existing Literature (Two Main Streams)...96

Figure 3.2: Hermalin and Weisbach (2003) theoretical model with respect to
boards of directors: The joint-endogeneity problem plaguing work on boards of
directors....97
Figure 4.1: Factors affecting the decision to disclose environmental or social
information..101
Figure 6.1: The structural equation model on boards of directors ....146
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Chapter 1: Introduction
1.1 Background and motivation
The credit crisis and climate change have led mainstream investors to become
increasingly aware of sustainability reporting as an important information source
of insight into the long-term viability of companies. The UK was the first country
to introduce mandatory carbon reporting. The Deputy Prime Minister of the UK
at the Rio+ 20 Submit 2012 said that,
Counting your business costs while hiding your greenhouse gas

emissions is a false economyBritish companies need to reduce
their harmful emissions for the benefit of the planet, but many back
our plans because being energy efficient makes good business
sense too. It saves companies money on energy bills, improves their
reputation with customers and helps them manage their long-term
costs too. (Source: published by the Department for Environment
Food and Rural Affairs website on 20th June 2012)
The financial crisis is an opportune time to refocus on how firms are managing
their environmental and social responsibility. 90% of UK large public companies
now report regularly on the environment and social impacts of their business
operations (Grayson, 2007, p.5). Moreover, there is evidence particularly from
the UK to suggest that firms are now producing higher and better quality
environmental and social disclosures (Gray et al., 1995). With the rising trend in
the quantity and quality of environmental and social disclosures, a number of
studies have examined the link between a firms environmental disclosures and
its financial performance including profitability (Brammer and Pavelin, 2006,
2008; Clarkson et al., 2008; Cormier et al., 2011; Freedman and Jaggi, 1988;
Patten, 1991). However, all of these mentioned studies find no link between
environmental disclosures and various measures of a firms profitability.
Discussing the limitations of their own work, and that of others, Brammer and
Pavelin (2008) suggest that future work should use longitudinal data and try to
resolve causality concerns. In this thesis, I address both these issues. Using
longitudinal data (2005-2009), I first establish the contemporaneous association
between environmental and social disclosures and firm profitability, and then
drawing upon Nelling and Webbs (2009) application of Granger causality
methodology I address the issue of causality between these variables.
There has also been a substantial increase in socially responsible investment in

recent years in the UK, especially the growth in the number of socially
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responsible investment funds offered by institutional investors. Institutional
investors are playing an important role in progressing corporate social
responsibility and have an important role in promoting more responsible
business behaviour. There has been a substantial increase in socially
responsible investment in recent years in the UK, especially the growth in the
number of socially responsible investment funds offered by institutional
investors who are demanding improvements in social and environmental
disclosure generally (Solomon, 2007; p.241). Yet, according to Clarkson et al.
(2011), less than 50% of surveyed chief financial officers and top environmental
officers believe environmental responsibility can enhance shareholder value.
However, from a capital markets perspective, public disclosures of how a firm
addresses its environmental and social challenges can have significant financial
implications. To the extent that these disclosures reveal a firms current
environmental and social performance as well as its future potential, investors
can gauge how well the firm is currently managing its environmental and social
risks, and how well it is equipped to tackle these in the future. Based on such
arguments, some studies have examined the link between a firms
environmental disclosures and its market performance (e.g., Freedman and
Patten, 2004; Lorraine et al., 2004; Shane and Spicer, 1983; Stevens, 1984). All
of these studies find a negative stock market response to release of
environmental information.
The findings of the aforementioned studies however, are quite contrary to the
expectations based on voluntary disclosure theory (Verrecchia, 1983) that
higher and better quality environmental (and social) disclosures should help
reduce information asymmetry between the firm and its investors (Al-Tuwaijri et
al., 2004; Brammer and Pavelin, 2008). Results of the recent work in this area
however, have been more in line with this theoretical reasoning. For example,
Cormier et al. (2011) find that environmental and social disclosures help reduce
the information asymmetry (as measured by the stocks bid-ask spread and its
share price volatility) between the firm and its investors. Hence, it can be
argued that higher and better quality environmental and social disclosures can
be a reflection of superior environmental and social performance (Verrecchia,
1983), can help lower the information asymmetry between a firm and its
investors, and by implication lower its firm risk. Thus such disclosures would be
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associated with higher market values of such firms. Accordingly, in this thesis, I
extend Cormier et al.s (2011) analysis by examining the link between a firms
environmental and social disclosures and its market value. It is important to
mention here the findings on the relation between corporate environmental and
social disclosures and firm environmental and social performance. Prior studies
on this topic find mixed results. For example, consistent with the legitimacy
perspective, Patten (2002a) finds a negative link, while consistent with the
economics based voluntary disclosure theory, Clarkson et al. (2008) find a
positive relationship between the two sets of variables. In this thesis, I further
test this link by using environmental and social disclosure scores and two
different environmental and social performance measures, namely carbon eco-
efficiency and employee productivity respectively. The findings of a positive
association between the two sets of variables lend further support to the
economics based voluntary disclosure theory argument.
The roles of governance (such as board attributes) and CSR strategy have
been rarely studied in the CSR field. Prior studies drawing on the management
perspective, particularly the resource-based view of the firm, have studied the
link between a firms economic performance and its environmental performance
(e.g., Al-Tuwaijri et al., 2004; Clarkson et al., 2011) assuming this link to be
driven by the unobserved or indirectly measured CSR strategy. Moreover, from
a corporate governance perspective, drawing particularly on the resource
dependency theory, scholars have studied the link between a firms board
attributes and corporate social performance (Johnson and Greening, 1999;
Mallin and Michelon, 2011).
While studies drawing on the management literature particularly the resource

based view of the firm (Hart, 1995) hypothesise that superior managerial
capabilities and superior CSR strategy translate into superior CSR performance,
neither of these two explanatory variables, are explicitly accounted for in the
research design. Nevertheless, these studies do acknowledge and control for
the possible endogeneity between managerial capability, CSR strategy and
CSR performance (e.g., Al-Tuwaijri et al., 2004; Clarkson et al., 2011). Studies
from the corporate governance perspective, while acknowledging the strategy
setting and advisory role of the board (as per resource dependency theory,
Pfeffer and Salancik, 1978), neither explicitly consider the strategic decisions of
12
the board in this regard, nor control for the possible endogeneity of the link (e.g.,
Mallin and Michelon, 2011). In other words, prior literature on CSR from both
management and corporate governance perspectives has tended to suffer from
conceptual as well as methodological limitations. Hence, to date, no prior study
takes a more integrated approach and studies the link between a firms CSR
related board attributes, its CSR strategy and its environmental and social
performance. In this thesis, using a sample of UK firms included in the FTSE
All-Share Index from 2002 to 2010, I investigate the relations among board
attributes, CSR strategy and firm environmental and social performance. Using
an aggregated measure of CSR strategy and a latent construct capturing board
level CSR attributes, I explore the possible endogenous link between CSR
related board attributes, board CSR strategy and firm environmental and social
performance.
1.2 Research aim and objectives

Based on the preceding discussion, the objectives of this research are:
1. To investigate the relation between a firms ESD and its operating

profitability, as well as to investigate the potential causality regarding this
link;
2. To examine the link between a firms ESD and its market value,
employee productivity and carbon eco-efficiency respectively;
3. To explore the relations among a firms CSR related board attributes,
CSR strategy and its environmental and social performance.
1.3 Structure of the thesis

This research is divided into seven chapters. Chapter 1 introduces the
motivation and the relevant background to this study. Chapter 2 discusses
relevant theoretical and regulatory frameworks about environmental and social
responsibility, as well as introduces the environmental and social responsibility
measures used in this thesis. Chapter 3 reviews existing empirical literature
about the interrelationships among corporate social responsibility, corporate
governance and financial performance, followed by three empirical studies
including chapter 4, 5 and 6. The last chapter provides a conclusion of this
thesis.
13
The three research objectives enumerated above, are studied through three
empirical chapters (i.e., Chapter 4, 5 and 6). Chapter 4 investigates the
determinants of a firms ESD. The main research question of this empirical
study is: is there an association between a firms operating profitability and its
ESD? If so, what is the direction of causality between a firms operating
profitability and its ESD? In this chapter, based on prior literature (e.g., Lee and
Hutchison (2005) disclosure framework), I also control for a wide array of
variables as determinants of ESD. Then using a pooled cross-sectional and
time series data on FTSE 350 companies for most recent 5 years (2005-2009), I
develop two sets of OLS regression models: one examines the relation between
profitability and ESD, the other tests potential causality between operating
profitability and ESD (i.e., Granger causality analysis). Finally, the robustness
check further controls for the influence of governance disclosure on ESD.
Chapter 5 examines the link between a firms ESD and its market value, and
tests the relation between environmental (social) disclosure and environmental
(social) performance. The research questions of this chapter are: first, is there
an association between a firms ESD and its market value? Second, is there
any relationship between a firms social disclosure and its employee productivity?
Third, is there any association between a firms environmental disclosure and its
carbon eco-efficiency? Accordingly, three regression models are developed to
test these three questions.
Chapter 6 investigates the relations among board attributes, firm CSR strategy
and its environmental and social performance. This analysis draws on Hermalin
and Weisbach (2003) theoretical framework, and develops a conceptual model
to explore the possible endogenous links between board attributes, CSR
strategy and firm environmental and social performance. Using a longitudinal
dataset drawn from FTSE All Shares companies for nine years (2002-2010),
structural equation modelling technique is used to examine these links.
Overall, this thesis makes a number of contributions to existing CSR studies.

First, contrary to prior mixed results (e.g., Brammer and Pavelin, 2008; Clarkson
et al., 2008; Ioannou and Serafeim, 2012); it finds a clear positive link between
a firms profitability and its environmental and social disclosures. It also
establishes the direction of causality of this link, finding it to run from profitability
14
to disclosures. Second, it finds a clear positive link between a firms
environmental and social disclosures and its market value. It thus extends the
work of Cormier et al. (2011) who find that such disclosures reduce information
asymmetry between a firm and its investors, but who do not explicitly establish
the link of such disclosures with firm market value. Third, as mentioned above,
prior literature on CSR from both management (particularly the resource based
view of the firm) and corporate governance perspectives has tended to suffer
from conceptual as well as methodological limitations. This study takes a more
holistic approach, develops and tests a theoretical model that incorporates
board attributes and CSR strategy variables into the analysis of a firms
environmental and social performance. It methodologically and conceptually
advances the management related stream of CSR literature, by explicitly
measuring and incorporating in the research design variables that directly
measure a firms board level CSR orientation and its CSR strategy, linking
these with the firms environmental and social performance. The analysis thus
helps advance the RBV-based CSR literature, by explicitly identifying the board
level human resources and CSR strategies that can help firms achieve a
competitive edge in the field of CSR. Furthermore, it contributes to the
corporate governance related stream of CSR literature, by developing a
theoretical model (adapted from Hermalin and Weisbach, 2003) which makes
explicit the potentially endogenous links between board director attributes, firm
CSR-related strategic decisions, and corporate environmental and social
performance. It thus addresses two recent calls in this literature: first to address
the issue of endogeneity in board-firm performance type analysis (Adams et al.,
2010); and second, it responds to the recent call to conduct board attributes-
conduct-performance type analysis (Johnson et al., 2013). The theoretical
model developed in this thesis and its subsequent testing is among the first
steps in addressing these calls.
Finally, contrary to prior studies the majority of which focus on environmental

responsibility, this thesis investigates environmental and social responsibility
separately. Cormier et al. (2011) call for a separate analysis of environmental
and social responsibility measures in future research.
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Chapter 2: Environmental and social responsibility: theoretical
and regulatory frameworks
2.1 Introduction
While investors have traditionally focused solely on firms financial performance,
there is now growing interest in how firms perform on environmental and social
issues. With the introduction of the Climate Change Act 20081, environmental
and social responsibility has gained increased importance. UK has become the
first country to introduce mandatory carbon reporting. According to
(Papanicolaou et al., 2012),
On 20 June 2012, the UK Deputy Prime Minister, Mr Nick Clegg,

announced at the Rio +20 Summit that all companies listed on the
Main Market of the London Stock Exchange will be required to report
their annual levels of greenhouse gas ("GHG") emissions from the
start of April 2013. The announcement, which will initially affect an
estimated 1,100 companies, follows a public consultation on policy
options undertaken during the course of 2011. (Source: published
on the Jones Day website 04 July, 2012)
Firms environmental and social policies as well as their performance in this
area in any given year are increasingly important for all classes of investors and
essential for the growing socially responsible investment market, and for
investments in firms that meet specified environmental and social criteria.
Moreover, the credit crisis has caused mainstream investors to become

increasingly aware of firms environmental and social impact as an important
information source of insight into the long-term viability of their businesses. For
example, mainstream investors have come to recognize the usefulness of
environmental and social information as a proxy for evaluating firms
management quality and the ability of management to promote long-term firm
sustainability. Investors are now able to pursue a more fundamental integration
of environmental and social information into their financial analysis, given the
greater availability of materially relevant environmental and social information at
the key performance indicator level. In todays business climate, environmental
1
The Climate Change Act 2008 sets a target for the UK to reduce carbon emissions to 80% below 1990 levels by
2050. It also set an interim target of a 34% reduction by 2020 (with the potential to increase this to a 42% cut given
an international agreement) and established the concept of carbon budgets.
16
and social responsibility contributes to meeting environmental and social
challenges as well as avoiding and/or meeting government regulations.
2.1.1 Definitions and background

The definition of environmental and social responsibility is complex and diverse,
which is commonly referred to as corporate social responsibility (CSR) or at
times as environment, social and governance (ESG) responsibility. As socially
responsible investment has become more firmly established as one of the
mainstream considerations in institutional investment, the terminology has
broadened to include environmental, social and governance factors, referred to
as ESG factors. (Solomon, 2007; p.272)
Commission of the European Communities (2002) defines corporate social

responsibility as
companies having responsibilities and taking actions beyond their

legal obligations and economic/business aims. These wider
responsibilities cover a range of areas but are frequently summed up
as social and environmental where social means society broadly
defined, rather than simply social policy issues. This can be summed
up as the triple bottom line approach: i.e. economic, social and
environmental. (p.5)
According to Dahlsruds (2008) study, the UK government (2001) states that

corporate social responsibility
recognizes that the private sectors wider commercial interests

require it to manage its impact on society and the environment in the
widest sense. This requires it to establish an appropriate dialogue or
partnership with relevant stakeholders, be they employees,
customers, investors, suppliers or communities. CSR goes beyond
legal obligations, involving voluntary, private sector-led engagement,
which reflects the priorities and characteristics of each business, as
well as sectoral and local factors. (p.10)
With the development of stakeholder theory, CSR is the concept used to refer to
the responsibility of a corporation towards all relevant stakeholders.
The term ESG appears in the United Nations Principles of Responsible

Investment (UNPRI) and is also employed by major business consulting firms.
The terminology is employed in various contexts risk valuation, socially
responsible investment, corporate responsibility etc. It has been used as a
generic term in capital markets in recent years.
17
The definitions show that environmental and social responsibility is not new at a
conceptual level; business has always had environmental and social impacts,
been concerned with stakeholders - government, customers or owners, and
dealt with regulations. Hence, in this thesis, CSR and ESG refer
interchangeably to a firms environmental and social responsibility.
2.1.2 Difference and linkage between environmental and social

disclosures (ESD) and environmental and social performance (ESP)
Environmental and social responsibility encompasses both environmental and
social disclosures (ESD) and environmental and social performance (ESP),
which will be studied separately in this thesis. Many prior studies fail to
differentiate ESD from ESP. Therefore, it is important to point out the difference
between ESD and ESP. ESD stands for disclosures collected from firms
reports e.g., sustainability report, annual report, website etc. For instance,
previous researchers use annual reports to measure ESD, including Business
Review, Operating and Financial Review and other 10K reports (e.g., Ingram
and Frazier, 1980; Wiseman, 1982; Gray, 1995; Patten, 2002a; Deegan et al.,
2002; Campbell, 2003; Henriques, 2010). ESP refers to firms actual
environmental and social performance such as Toxic Release Inventory (TRI)
data, carbon emission, water usage, employee CSR training and community
contribution etc. (Al-Tuwaijri et al., 2004; Clarkson et al., 2008).
However, there is a significant linkage between ESD and ESP. One the one
hand, it can be argued that firms doing good should be willing to provide more
green information (Clarkson et al., 2008). On the other hand, it can also be
argued that poor environmental or social performers may tend to provide more
information for gaining legitimacy (Patten, 2002a). Hence, drawing upon the
economics based voluntary disclosure theory, one can argue that firms with
good environmental and social performance should be willing to provide more
ESD, which is difficult for poor firms to mimic. From socio-political theories,
firms with poor environmental and social performance should tend to provide
more ESD to meet external environmental and social challenges such as
legitimacy pressure. Both types of theories will be discussed further in the next
section.
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Empirically, Clarkson et al. (2008) drawing on both economics based voluntary
disclosure theory and socio-political theories, investigate the relation between
firms environmental performance and environmental disclosure. Environmental
disclosure data is collected from firms sustainability reports or websites. A
refined disclosure index is developed based on GRI guidelines published in
2002. They focus on purely discretionary disclosure (i.e., data is collected from
voluntary disclosure sources such as sustainability reports or websites), which
is helpful in analysing the propensity and quality of voluntary disclosure.
Environmental performance is measured by the total toxic waste that is treated,
recycled or processed as a percentage of the total toxic waste generated by
each firm (% recycled) and the ratio of TRI to firm sales. Clarkson et al. (2008)
predict either a positive association between environmental performance and
the level of discretionary environmental disclosure as per voluntary disclosure
theory, or a negative association as implied by the socio-political theories. Their
findings support economics based voluntary disclosure theory. In other words,
they find that firms with better environmental performance tend to disclose more
voluntary environmental information, which is difficult for poor firms to mimic
(i.e., differentiate their firm types).
Patten (2002a) examines the relationship between environmental disclosure

and environmental performance for a sample of 131 US companies.
Environmental disclosure is based on firms annual reports in 1990 (i.e., content
analysis of 8 indicators and also report line counts). Environmental performance
is measured as the ratio of a firms specific amount of toxics released to
revenue (both data are for the year 1988). After controlling for firm size and
industry classification, Patten finds a negative and significant link between
environmental disclosure and environmental performance.
In this thesis, Chapter 4 examines ESD and firm profitability; Chapter 5

examines ESD and firm market value, employee productivity and carbon eco-
efficiency respectively; and Chapter 6 investigates the link between board CSR
attributes, CSR strategy and firm ESP. I use Bloomberg environmental and
social scores to measure firms environmental and social disclosures, and adopt
Asset4 environmental and social scores to measure firms environmental and
social performance. Detailed explanation about these two datasets is provided
at the end of this chapter.
19
2.2 Voluntary ESD
Current economic recession has underscored the need for companies to
become more transparent in terms of providing both financial and non-financial
disclosures. Thus, environmental and social disclosures have become part of
companies governance to control and manage potential risk such as regulatory
risk related to environmental fines.
Environmental and social information from a firm addresses several stakeholder

groups, not just investors and financial analysts. There are different users of
environmental and social reports such as investors, regulators and competitors
etc. Voluntary ESD enables users to better understand and communicate with
firms. For example, Solomon (2007) states that for environmental reporting, the
United Nations Environment Programme identified the following user groups:
employees, legislators and regulators, local communities, investors, suppliers,
customers and consumers, industry associations, environment groups, science
and education, and the media (p.246). Environmental reports enable regulators
to know firms environmental impact and can thus help make future
environmental policy. Thus ESD should address a wide array of user groups a
variety of stakeholders. Furthermore, firms that issue environmental and social
reports are expected to gain from meeting investors demands, from cost
savings and from building a broad-based corporate reputation (Dowling, 2004).
Thus it can be seen that investors appear to be an important user group of
environmental and social information, and ESD could be a communication
channel between firms and their (largely institutional) investors.
In the following section, first, general voluntary disclosure theory is introduced,

followed by relevant theoretical frameworks underlying ESD. Then ESD drivers,
challenges and recommendations are reviewed.
2.2.1 General voluntary disclosure theory

Firms provide mandatory disclosure through regulated financial reports such as
financial statements, which is compulsory for all UK companies. Some firms
engage in voluntary communication such as analysts meetings, sustainability
reports and internet sites etc. Gibbins et al. (1992) argue organisations may
disclose information to support the efficiency of exchange and production, but
they also disclose information to establish their compliance with the social
20
values in regulations and informal norms. Reporting and disclosure are among
the most important tools used by companies to communicate with their
stakeholders and diminish information asymmetry between them.
Voluntary disclosure refers to information made public through a firms free

choice. It could be affected by culture, social, economic or behavioural factors
that are specific to each firm. There is no general accepted definition for
voluntary disclosure. Francis et al. (2008) state that,
The primary insight from theoretical work is that managers disclose

their private information because rational market participants would
otherwise interpret nondisclosure as unfavorable news and
consequently discount the value of the firms assets (see Grossman
and Hart [1980], Milgrom [1981], Verrecchia [1983, 2001]). The
managers disclosure mitigates the adverse selection problem in
capital markets by reducing information asymmetry between the firm
and investors, enabling greater liquidity and lowering the firms cost
of capital (Glosten and Milgrom [1985], Diamond and Verrecchia
[1991]). (p.56)
Furthermore, Tian and Chen (2009) state that,
Compulsory information disclosure means relevant laws and rules,

such as Company Law, Securities Law, Accounting Rules, and
regulatory agencies regulations, clearly regulate that listed
companies must actualize information disclosure. Voluntary
disclosure means, except for compulsory disclosure, listed
companies disclose information voluntarily for the sake of companies
images, investors, and accusation risks avoidance. (p.55)
Voluntary disclosures can include strategic information such as company

characteristics and strategy, and nonfinancial information such as socially
responsible practices. Thus voluntary disclosure represents the excess of
information that depends on the free choice of management decision and
outside market factors.
Costs and benefits analysis
Managers of companies provide voluntary information which they consider is

useful for stakeholders needs. In other words, the voluntary disclosure is
considered by mangers to be incremental information or serves other purposes
that benefit the company. Voluntary disclosure can benefit investors and firms.
It reduces information asymmetry and helps investors make better capital
allocation decisions. Furthermore, voluntary disclosure may enhance a firms
21
credibility, based on the perception that cost of the information released is a
sufficient condition to assure the firms credibility. In addition, voluntary
environmental and social disclosures could act as a signal of ethical and
trustworthy corporate governance. Stakeholders believe these firms not only
have integrity but also competent managers. In short, the potential benefits of
voluntary environmental and social information can be the increase of share
value and investor numbers; improvement of the access to capital market and
the relations with external stakeholders; and the reduction of share volatility and
information asymmetry.
However, providing voluntary information may decrease competitive advantage,

and it is costly to provide information voluntarily. Voluntary information may
affect the competitive advantage of firms, because voluntary information may
enable competitors to value/position a firm, especially for the same industry.
Moreover, voluntary disclosure implies additional costs to companies including
both real and opportunity costs. From an accounting and economics
perspective, production and distribution of voluntary environmental and social
information entails costs, even if it is likely to confer benefits (Verrecchia, 1983).
For example, Brammer and Pavelin (2008) suggest that there are two types of
costs involved in making disclosures: the costs of measuring, verifying, collating
and publishing environmental (and social) information; and the loss of strategic
discretion associated with making public commitments to verifiable future
actions and/or performance (p.122).
Hence, it is important for firms to balance the benefits of voluntary disclosure

against the costs. If benefits exceed costs either in the short or long term
(depending on the managers purpose), then they will choose to disclose
information voluntarily.
It is worth mentioning the proprietary costs theory. Proprietary information is

defined by Dye (1985) as
any information whose disclosure potentially alters a firms future

earnings gross of senior managements compensation This
includes information whose disclosure could generate regulatory
action, create potential legal liabilities, reduce consumer demand for
its products, induce labor unions or other suppliers to renegotiate
contracts, or cause revisions in the firm's credit standing in addition
22
to that information which is, in the traditional sense, strategically
valuable. (p.123)
Dye (1985) also proposes in the discussion that all market participants share
the common belief that the private information contemplated to be released by
the firm being studied is non-proprietary. Under the proprietary costs theory,
Dye (1985) shows that nondisclosure or partial disclosure can be optimal option
for companies even if credible information is available.
The proprietary costs theory (Verrecchia, 1983; Dye, 1985) suggests that
companies should be fully transparent if there are no costs to be transparent.
However, empirical studies show there is variation in disclosure quality (Beyer
et al., 2010), implying it is important to balance the tension between the costs
and benefits of disclosure. An explanation can be that there are proprietary
costs to disclosure which are driven by rent-extracting from stakeholders such
as competitors and suppliers etc.
2.2.2 Theoretical frameworks underlying ESD

Existing literature suggests that there is no unifying theoretical framework
explaining voluntary ESD. Some earlier studies point to the lack of a testable
theory (Ingram and Frazier, 1980; Wiseman, 1982) related to motivation for
such disclosures. More recent studies suggest that there are a few theoretical
frameworks that could explain firms voluntary ESD.
One stream of existing literature uses legitimacy or political economy theories to

explain firms environmental or social disclosures (Gray, 1995; Patten, 2002a;
Deegan, 2002; Campbell, 2003; Cho and Patten, 2007). These so called socio-
political theories argue that firms with the worse public image tend to disclose
more environmental and social information. In other words, poor performers
who face more political and social pressure and threatened legitimacy, attempt
to increase discretionary ESD to change stakeholders perceptions about their
actual performance. The socio-political theories tend to emphasize external
contextual factors (such as media visibility) and corporate characteristics (such
as industry and size) to determine E or S disclosure.
The other stream of studies attempts to use economics based theories to

explain firms environmental and social disclosures, such as agency theory or
economic costs and benefits analysis (Cormier et al., 2011; Clarkson et al.,
23
2008). According to economics based theories, firms with better financial/non-
financial performance should disclose more environmental and social
information. These firms should attempt to convey their firm types through
voluntary ESD which would be difficult for poor firms to mimic. Economics
based theorists place more emphasis on firms financial characteristics such as
market performance, operating financial performance, and economic costs (i.e.,
costs and benefits analysis) to determine the motive for environmental and
social activities.
However, according to Hershcovis et al. (2009),
while the socio-political theorists more often present sustainability

reporting as non-credible, the economic perspective suggests that
disclosure decisions are based on a cost-benefit assessment, not
necessarily to manage impressions for the stakeholders. Although
most research has argued for either one theory or the other, the
reality may be a combination of both, which is rooted in the learning
curve of preparers and internal processes of organizations (p.9).
Hershcovis et al.s (2009) argument indicates that the learning curve of

preparers and internal processes such as internal corporate governance matter,
and there is not necessarily one theory to explain corporate environmental and
social disclosures. Indeed, the findings regarding the determinants of ESD
indicate that both types of theories could work together. For example,
economics based theories can explain the influences of profitability, while socio-
political theories tend to explain media exposure and industry effects. Some
relevant theoretical frameworks of both categories, namely socio-political
theories and economics based disclosure theories are reviewed in the following
sections.
Socio-political theories
2.2.2.1 Legitimacy theory

Legitimacy theory has become increasingly used by accounting researchers in
the last decade, particularly researchers working in the area of environmental
and social accounting to explain ESD (Patten, 1992; Gray et al., 1995; Deegan
and Rankin, 1996). For example, the theory has been used to explain voluntary
disclosures made within annual reports or sustainability reports. The following
section will describe the notion of social contract and legitimacy theory used
to explain ESD.
24
Legitimacy theory is centred on the notion of a social contract. Social contract
refers to a contractual relationship between organisations and society. The
existence of this contract ensures business to perform various socially desired
actions in return for approval of its objectives, other rewards and ultimate
survival. Failure to comply with societal expectations (in essence, to comply
with the terms of the social contract) may lead to sanctions being imposed by
society (Deegan and Unerman, 2006; p.271). However, different managers will
have different perceptions about the terms of the social contract, and hence
they will adopt different strategies to ensure firms operations are acceptable to
various stakeholders.
The concept of legitimacy is central to legitimacy theory. Legitimacy is defined

by Suchman (1995) as a generalised perception or assumption that the actions
of an entity are desirable, proper, or appropriate within some socially
constructed system of norms, values, beliefs and definitions (p.574).
Legitimacy theory is described as a positive theory (Deegan, 2006), as it seeks
to explain firms behaviour in terms of efforts made to appear legitimate, rather
than prescribing how firms should behave (which is the role of a normative
theory of corporate conduct). When a firms performance threatens its
legitimacy, it will lead to economic (e.g., limited provision of financial capital),
legal (e.g., lawsuits) or social (e.g., publicity campaigns) action.
Legitimacy theory implies a reactive or proactive approach of companies to

provide voluntary ESD. On the one hand, firms can voluntarily disclose any
positive environmental and social information to inform stakeholders about their
intentions to improve their environmental and social performance. On the other
hand, when firms environmental and social activities threaten their legitimacy,
they can provide extra environmental and social information to influence
stakeholders perceptions about their negative performance without changing
actual behaviour. Legitimising strategies might also occur at an industry level.
That is, if an entire industry has a crisis of legitimacy it might be efficient for a
centralised industry body to undertake activities that bring some legitimacy to
the industry as a whole (Deegan, 2006).
Legitimacy theory originates from political economy theory (Deegan, 2006) that
will be discussed in the next few paragraphs.
25
2.2.2.2 Political economy theory
Gray et al. (1996) state political economy theory is the social, political and
economic framework within which human life takes place (p.47). Political
economy theory has been divided into two broad streams by Gray et al. (1996)
classical and bourgeois political economy. Classical political economy
theory tends to explain disclosures as being a tool by which powerful individuals
maintain their own favoured positions to the detriment of those individuals
without power. Bourgeois political economy theory is content to perceive the
world as essentially pluralistic. Legitimacy theory is embedded in the bourgeois
branch of political economy theory, which assumes that many classes of
stakeholders have the power to affect various decisions by companies,
government and other entities. Empirically, Gray et al. (1995) conduct a
longitudinal study about corporate social disclosure in the UK, using the CSEAR
social disclosure database for the period covering 1988-1995. The data
reported is collected by using content analysis of UK firms annual reports.
However, due to time and labour constraints, the database was collected only
up to year 1995. Gray et al. (1995) review relevant literature about corporate
social reporting and investigate the trends of social disclosure in the UK. They
argue that political economy, legitimacy theory and stakeholder theory need not
be competitor theories but may be seen as alternative and mutually enriching
theories from alternative levels of resolution. By using the bourgeois political
economy theory, the findings indicate a significant change in social disclosure
behaviour throughout the period. Overall, the theoretical perspectives prove to
offer different, but mutually enhancing, interpretations of these phenomena
(Gray et al. 1995).
According to Deegan and Unerman (2006),
political economy theory explicitly recognises the power conflicts

that exist within society and the various struggles that occur between
various groups within society. The perspective embraced in political
economy theory and also legitimacy theory, is that society, politics
and economics are inseparable and economic issues cannot
meaningfully be investigated in the absence of considerations about
the political, social and institutional framework in which the economic
activity takes place. (p.269)
Solomon (2007) posits that from a corporate environmental reporting
perspective,
26
political economy theory focuses on power and conflict in society,
the specific historical/institutional environment of the society in which
it operates and the acknowledgement that corporate environmental
reporting can reflect different views and concerns. (p.242)
Hence, based on political economy theory, environmental and social reports

can serve as a tool for constructing, sustaining and legitimising economic and
political arrangements, institutions, and ideological themes which contribute to
the corporations private interests. Disclosures have the capacity to transmit
social, political, and economic meanings for a pluralistic set of reporting
recipients (Guthrie and Parker, 1989; p.166).
Economics based voluntary disclosure theories
2.2.2.3 Agency theory

Jensen and Meckling (1976) define the principal-agent relationship as a
contract under which one or more persons (the principal(s)) engage another
person (the agent) to perform some service on their behalf which involves
delegating some decision making authority to the agent (p.308). In the agency
framework, managers are the agent and shareholders are the principal.
According to Jensen and Meckling (1976), the basic principal-agent relationship
is confronted with a fundamental issue the agency problem. That is, the agent
may not act in the best interests of the principal. Furthermore, the agency
problem is seen to exacerbate under conditions of information asymmetry.
Cormier et al. (2011) posit that more environmental or social disclosure leads to
less information asymmetry between a firm and its investors, thus lowering firm
risk. Hence, shareholders seek to control managers behaviour through bonding
costs and monitoring activities (Jensen and Meckling, 1976). Under agency
theory, voluntary disclosure can be seen as one of the bonding costs incurred
on the part of managers to minimize their agency costs (Jensen and Meckling,
1976). Managers may show shareholders that they are acting optimally through
voluntary disclosure (Jensen and Meckling, 1976).
It is worth mentioning that some theories can be applied to both ESD and ESP.
For example, from an information asymmetry perspective, agency theory can be
used to explain ESD, while from an over and under investment point of view,
agency theory is more relevant to ESP, which will be explained in the next
paragraph.
27
Friedman (1970) posits that engaging in CSR is symptomatic of an agency
problem or a conflict between the interests of managers and shareholders. He
argues that managers can use CSR as a means to pursue their own social,
political, or career agendas at the expense of shareholders. Based on this
argument, Barnea and Rubin (2006) state that if CSR expenditure reduces firm
value, then a negative relation between CSR expenditure and insider ownership
is expected. They argue that a firms insiders (corporate managers, directors
and large blockholders) may have an incentive to increase CSR expenditure to
a level that is higher than that which maximizes firm value if they gain private
benefits (e.g., enhance their reputation for respecting their employees,
communities and the environment) from a high CSR rating. Hence, CSR may
create a conflict between different shareholders. They also argue that a firm
with high debt levels will be more difficult for insiders to over-invest in CSR, as
they have less cash available. Barnea and Rubin (2006) use a sample of large
US companies to examine the relation between firms' CSR performance ratings
and their ownership and capital structures. The dependent variable is CSR
rating of each firm, and key independent variables are insider ownership,
institutional ownership and leverage. Consistent with their expectation, they find
that CSR performance can create a conflict between different shareholders, and
find insider ownership and leverage are negatively related to a firms social
rating, while institutional ownership is uncorrelated with it. They explain that at
high ownership levels, the cost to insiders of increasing CSR expenditure
(which yields a higher CSR rating) is larger than the related benefits. In other
words, insiders downplay the importance of their private benefits compared to
firm value because they own more of the firm. Thus, the negative relation
suggests that the cost incorporated in CSR is significant (p.16). Furthermore,
the negative correlation between leverage and CSR also supports the CSR-
conflict hypothesis, as higher leverage makes firms spend less on CSR.
Recently, Jo and Harjoto (2012) investigate the relation between CSR

performance and corporate financial performance (CFP) and examine the
relative importance of stakeholder theory and agency theory by using a large
sample of US companies during the period from 1993 to 2004. They propose
two hypotheses, namely the overinvestment hypothesis based on agency
theory and the conflict resolution hypothesis based on stakeholder theory. In
28
other words, agency theory-based overinvestment hypothesis indicates that
CSR engagements are costly activities and a waste of scarce resources, and
therefore have an adverse impact on firm value. However, stakeholder theory-
based conflict-resolution explanation predicts that the firm value of socially
responsible firms engaging in CSR activities is higher than that of socially
irresponsible firms ignoring CSR activities, because CSR engagement reduces
conflict of interest between managers and non-investing stakeholders. This
implies firms still under-invest in CSR activities and that the financial market
values investment in CSR activities.
As mentioned above, from the overinvestment perspective, Barnea and Rubin

(2010) argue that CSR engagement may cause a principal-agent problem.
Affiliated insiders may have an interest in overinvesting in CSR, if doing so
provides private benefits such as enhancing their reputation as good social
citizens. However, from the conflict resolution perspective, stakeholder theory
indicates that managers conduct CSR to fulfil their moral, ethical, and social
duties for their stakeholders and strategically achieve corporate goals for their
shareholders. After correcting for endogeneity bias, Jo and Harjoto (2012) find
that CSR engagement positively influences CFP, which supports the conflict-
resolution hypothesis based on stakeholder theory rather than the CSR
overinvestment argument based on agency theory. In addition, they find that
firms CSR engagement with the community, environment, diversity, and
employees plays a significantly positive role in enhancing CFP.
2.2.3 Drivers of ESD

Solomon and Lewis (2002) suggest that markets, social, political and
accountability factors are the main sources of incentives for environmental and
social reporting. They summarize the incentives to disclose as: to improve the
companys image; to market the company and its products; to comply with
regulations; to manage pressure from customers and peer companies in the
same industry; to attract investment; to meet the demand for environmental
information; to acknowledge social responsibility; as a form of political lobbying,
as an acceptance of change in societys ethics and a result of company ethics.
According to them, costs of disclosure, lack of awareness of environmental
issues, and avoiding providing information to competitors are main reasons for
not disclosing.
29
Maximiano (2007) conducts a survey of CSR completed by members of the
Philippines Chamber of Commerce and Industry and a focus group discussion
of CSR experts. Based on the feedback from CSR experts, respondents
perceive the motivation to apply CSR disclosure is consumers demand. This
implies that the public expects firms to be ethical and socially responsible, thus
public expectation is a key driver that motivates firms to practice and
institutionalize their CSR. According to Maximiano (2007), this is followed by the
improvement of firms reputation and image. Managerial and personal values
rank the third, part of business strategy ranks the fourth, community demand is
the fifth, and recruitment and retention of employees rank the sixth. Compliance
with regulations and laws appears to be a motivator that drives firms to
institutionalize their CSR. However, according to Maximiano (2007), it seems
that regulatory compliance is the least of all enumerated drivers. As 166
business executives say that businesses should institutionalize CSR, which
means going beyond compliance with laws and regulations.
2.2.4 ESD challenges and recommendations

For researchers, there are some challenges to measuring the quality of
voluntary ESD. First, given the absence of clear mandatory guidelines as to
what firms should report in terms of their environmental and social responsibility,
how studies measure ESD varies greatly. Second, even though there are some
reporting frameworks such as GRI guidelines; it is difficult to quantify key
performance indicators to ensure that these are comparable between firms and
industries. Bloomberg disclosure scores used in this thesis, provide a
comprehensive ESD measure with comparable and quantifiable indicators.
These will be discussed in detail at the end of this chapter.
In the way of suggestions for improving the quality of disclosures, Jones (2010)
makes some recommendations for firms and their accountants in relation to
environmental reporting. First, Jones (2010) suggests that managers and
accountants should take immediate action to address their environmental
threats. Second, they should use new environmental accounting systems to
measure, capture and disclose corporate environmental impacts. Third, explore
alternative monetary and non-monetary valuation systems. Finally, companies
should disclose their environmental performance or activities to their
stakeholders. Building on prior literature, Jones also develops a multilayered
30
theoretical model (eight premises) with respect to environmental accounting and
reporting. Based on the theoretical model, Jones posits that firms should report
their environmental accounting to their stakeholders because of the stewardship
function of the boards. Overall, it appears that self-regulated voluntary approach
might be suitable, when the market is still learning the merits of environmental
and social responsibility.
2.3 ESP
In this section, theories underlying ESP are reviewed, followed by the
discussion of ESP importance.
2.3.1 Theoretical frameworks underlying ESP
2.3.1.1 Stakeholder theory

The most dominant theory used by existing CSR studies is stakeholder theory.
Freeman (1984) asserts that firms have relationships with different stakeholders
who both affect and are affected by the actions of the firm. He defines a
stakeholder as any identifiable group or individual who can affect the
achievement of an organisations objectives, or is affected by the achievement
of an organisations objectives (p.46). In accordance with this paradigm,
stakeholders include customers, suppliers, employees, communities, and the
general public, besides managers, stockholders and creditors. Freeman (1984)
suggests that managers should understand a firms rationale, the organisational
process used to mange relationships with stakeholders, and the set of
transactions that takes place among the organizations and their stakeholders.
Freemans (1984) stakeholder theory states that firms should use CSR as an
extension of effective corporate governance mechanisms to resolve conflicts
between managers and non-investing stakeholders.
Comparing with the shareholder theory that focuses on the shareholder primacy
(Friedman, 1970); stakeholder theory posits firms are accountable to all
stakeholders, not just their shareholders. Shareholders provide capital and bear
residual risk; a firm should remain accountable to its shareholders through its
management structure for maximising shareholders wealth. The accountability
relationship towards shareholders is termed as fiduciary duty under directors
responsibility of Companies Act 2006. However, it can also be argued that when
Enron collapsed, it was not only the shareholders but also every one of the
31
stakeholders suffered. Each of the stakeholders is compensated on the basis of
agreements (e.g., employees are compensated through salary, and other
suppliers of capital through return of their capital with interests), but they have a
legitimate or moral right to claim on the value created by the firm.
As mentioned in section 2.2.2.4, Jo and Harjoto (2012) investigate the relation

between CSR performance and corporate financial performance (CFP) and
examine the relative importance of stakeholder theory and agency theory. After
correcting for endogeneity bias, they find that CSR engagement positively
influences CFP, which supports the conflict-resolution hypothesis based on
stakeholder theory rather than the CSR overinvestment argument based on
agency theory.
The instrumental aspect of stakeholder theory explains the relationships

between stakeholder management practices and corporate performance. The
instrumental stakeholder theory suggests a positive relationship between ESP
and financial performance, and the satisfaction of various stakeholder groups is
instrumental for organisational financial performance.
Enlightened shareholder theory
According to Solomon and Solomon (2004), stakeholder-agency theory so

called enlightened shareholder theory 2 argues that the implicit and explicit
negotiation and contracting processes entailed by stakeholdermanagement
relationships serve as monitoring and enforcement mechanisms that prevent
managers from diverting attention from broad organisational financial goals.
Furthermore, according to Orlitzky et al. (2003),
by addressing and balancing the claims of multiple stakeholders

(Freeman and Evan 1990), managers can increase the efficiency of
their s adaptation to external demands. Additionally, according to a
firm-as-contract analysis (Freeman and Evan 1990), high corporate
performance results not only from the separate satisfaction of
bilateral relationships (Hill and Jones 1992), but also from the
simultaneous coordination and prioritization of multilateral
stakeholder interests. (p.405)
2
There is a gradual broadening of the corporate governance agenda, characterized by a move away from a narrow
agency theory view toward a broader, stakeholder-oriented view that embraces concepts of corporate social
responsibility and sustainability. (Solomon and Solomon, 2004)
32
Enlightened stakeholder theory
Enlightened stakeholder theory argues that stakeholder theory should not be

viewed as a legitimate contender to value maximization, because it fails to
provide a complete specification of a firms purpose. According to Jensen
(2010),
enlightened stakeholder theory, while focusing attention on

meeting the demands of all important corporate constituencies,
specifies long-term value maximization as the firms objective. (p.33)
It can make use of most of what stakeholder theorists offer in the
way of processes and audits to measure and evaluate the firms
management of its relations with all important constituencies.
Enlightened stakeholder theory adds the simple specification that the
objectives functionthe overriding goalof the firm is to maximize
total long-term firm market value. (p.39).
Furthermore, Jensen (2010) argues in order to maximize a firms market value,
managers who play a critical role in leading and sustaining the firms strategic
vision, must not only satisfy, but also enlist the support of all corporate
stakeholders. He states that enlightened stakeholder theory adds the simple
specification of a firms objective function (i.e., to maximize total long-term firm
market value), which differentiates from the (multi-objective) stakeholder theory
as proposed by Freeman (1984). Stakeholder theory gives them the
appearance of legitimate political access to the sources of decision-making
power in organizations, and it deprives those organizations of a principled basis
for rejecting those claims (Jensen 2010, p.42). In other words, it can be used
by managers to seek personal interests. However, enlightened stakeholder
theory enables management to assess the tradeoffs among its stakeholders,
which solves the problems arising from stakeholder theory.
It is necessary to point out the difference between the enlightened stakeholder

theory and the enlightened shareholder theory. Enlightened shareholder theory
would ultimately attribute priority to shareholders interests, but also encourage
firms to balance short-term loss against longer-term business success (Macve
and Chen, 2010). However, the enlightened stakeholder theory focuses on the
firms objective, which is to maximize total long-term firm market value.
Therefore, enlightened shareholder theory reflects an updating rather than a
replacement of the traditional view of the corporation as an instrument for
33
delegating to managers (as agents) the responsibility for maximising the
wealth of shareholders (as principals) (Macve and Chen, 2010).
2.3.1.2 Resource based view of the firm (RBV)

It is necessary to mention the resource based view of the firm (RBV). The RBV
theory is widely used in strategic management literature and is a basis for
explaining the competitive advantages of a firm (Penrose, 1959). To transform a
short-run competitive advantage into a sustained competitive advantage
requires the resources to be valuable, rare, inimitable and non-substitutable.
The resources can be divided into resources and capabilities: resources are
tradable and non-specific to the firm, but capabilities are firm-specific and are
used to engage the resources within the firm, such as implicit processes to
transfer knowledge within the firm (Makadok, 2001).
Penrose (1959)3 considers a close relation to exist between the availability of

resources to a firm and the development of innovative ideas and strategies by
its managers, while Bourgeois (1981) considers slack to be a resource cushion
that firms can use in a discretionary manner, both to counter threats and exploit
opportunities. The resource-based view of the firm proposes that valuable,
costly to copy firm resources and capabilities provide the key sources of a
sustainable competitive advantage (Barney and Arikan, 2005). In other words,
only firms with resources and capabilities that are not easily duplicated by
competitors can have a competitive advantage. Resources can be physical,
financial and firm-specific assets such as superior managerial or employees
skills and internal processes, and capabilities including the ability to accomplish
specific value-added tasks with development of supporting resources.
The RBV theory can be used to explain ESP. Firms with financial resources and
unique managerial capabilities, as manifested in superior environmental
strategies (as argued by Clarkson et al. 2011) are able to gain competitive
advantage. First to apply RBV theory to explain competitive advantages in
environmental responsibility is Hart (1995). Hart (1995) theorized that proactive
investments in environmental strategies including pollution prevention and
product stewardship could confer both environmental and economic benefits to
firms such as improving manufacturing efficiency, enhancing reputation and
3
Penrose (1956) states that excess resources are important determinants of organisational structure, growth, and
performance.
34
raising rivals costs. Hart (1995, p.999) also emphasized the importance of
communicating these environmental strategies to external stakeholders, as
these could .....reinforce and differentiate a firms position through the positive
effects of a good reputation. Furthermore, Russo and Fouts (1997) empirically
tested the predictions of RBV, and found a positive link between environmental
performance and firm operating profitability. They assumed this link to be
mediated by the unobserved superior environmental strategy which they
conjectured to be based on unique combinations of intangible (such as human,
reputation, technology), and tangible (such as financial reserves and physical
equipment) assets. The RBV theory has also been applied by more recent
studies including those of Al-Tuwaijri et al. (2004) and Clarkson et al. (2011)
both of whom argue that the reason for their finding of a positive link between a
firms environmental and financial performance is the unobserved capabilities
particularly managerial quality and CSR strategy.
2.3.1.3 Resource dependence theory (RDT)

According to Hillman et al. (2009), resource dependence theory is one of the
most influential theories in organisational theory and strategic management,
which recognizes the influence of external factors on organisational behaviour.
Although constrained by their context, managers can act to reduce
environmental uncertainty and dependence by providing essential resources to
a firm or by helping the firm secure these resources through linkages with its
external environment. RDT has been applied in corporate governance literature,
particularly in studies related to board of directors. Pfeffer and Salancik (1978)
suggest five actions that firms can take to minimize environmental dependences:
1) mergers/vertical integration, 2) joint ventures and other inter-organisational
relationships, 3) appropriate selection of members of boards of directors, 4)
political action, and 5) executive succession. Boards of directors can be a
solution to reduce external uncertainty including that posed by environmental
and social challenges. Furthermore, Pfeffer and Salancik (1978) suggest that
directors can bring four benefits to organisations: 1) information in the form of
advice and counsel, 2) access to channels of information between the firm and
environmental contingencies, 3) preferential access to resources, and 4)
legitimacy.
35
Based on the RDT theory, Mallin and Michelon (2011) argue that board of
directors can bring in four benefits to a firm: advice and counselling; legitimacy;
channels for communicating information between external organisations and the
firm and preferential access to commitments or support from important
stakeholders in the firms environment. Hence, directors can provide critical
resources to reduce external uncertainty, as well as can be seen as a
mechanism of legitimacy and reputation. In their analysis, board reputation is
captured by board composition, competence, diversity, leadership, structure
and links with the external environment. Based on these arguments, they find
that the proportions of independent, community influential and female directors
are positively linked with corporate social performance, while the presence of a
corporate social responsibility committee is positively associated with
community performance. In addition, they find that CEO duality and community
influential directors with multiple directorships have a negative effect on
corporate social performance of the 100 Best Corporate Citizens.
Hillman et al. (2009) posit that RDT can be integrated with other theoretical
perspectives to examine the phenomenon of interest. They point out that
several similarities exist between RDT and stakeholder theory, which both
recognize the firms interdependence on external and internal contingencies.
Hillman et al. (2009) state perhaps combining RDT recognition of the
multiplexity of dependencies with the insights from stakeholder theory would
yield greater insights for managing dependencies and the specific strategies to
do so. From the stakeholder and legitimacy perspective, the board of directors
can be seen as a mechanism of legitimacy and reputation, since its role is to
ensure the company is run efficiently and stakeholders interests are taken into
consideration in top managements decision making (Michelon and Parbonetti,
2010). From the resource dependency perspective, the board of directors can
provide critical resources to a firm and enables the firm to minimize its
dependence or gain resources from external environmental (Pfeffer, 1972). In
other words, the board of directors according to RDT theory can be a solution to
external challenges including CSR challenges that a firm faces in the market in
which it operates.
To sum up, in this thesis I draw on a number of different theories to support

different aspects of my empirical analyses as appropriate. The first empirical
36
chapter (i.e., Chapter 4) focuses on the economics based costs and benefits
analysis to examine the link between operating profitability and ESD. In the
second empirical chapter (i.e., Chapter 5), agency theory and the ensuing
information asymmetry problem, is used as the basis to investigate the relation
between ESD and market value of the firm. In the last empirical study (i.e.,
Chapter 6), RBV and RDT theories are adopted to explore the influences of
board attributes and CSR strategy on a firms ESP.
2.3.2 Importance of ESP

Solomon and Solomon (2004) note that it seems increasingly likely that creating
value for stakeholders by businesses focusing attention on maximizing value for
local communities, employees and environmental impacts, may be synonymous
with creating financial value for shareholders. Ignoring the needs of
stakeholders can lead to lower financial performance and even corporate failure.
Performance of a firm on its environmental and social challenges has now
become very important. It can affect a companys overall performance and risk
profile. A study by EIRIS (2009) shows that environmental and social
performance enables investors to understand corporate governance and risk
management of the firms in which they invest, and ensures capital flows to be
directed towards better-managed firms. ESP can potentially reflect a firms risk
management, its management quality and its competitive advantage.
ESP and risk management
When mainstream capital markets look at environmental and social issues, two
focal points immediately emerge: risk caused by (bad) environmental and social
performance, and business opportunities based on proactive environmental and
social performance (EFFAS, 2009). Environmental and social issues could
affect firms risk and business opportunities which are linked with their economic
performance. The scope of risk management systems has evolved from a
financial focus to a broader range of environmental and social issues. For
example, in the long run, ESP data assists in marketing firms names and
managing their reputation risk.
A study by EIRIS (2009) analyses the strategies of environmental and social

risk management for firms in the FTSE All World Development Index between
2005 and 2008. The study focuses on how well firms are addressing
37
environmental and social risks under four areas: board responsibility; risk
management systems; identification of environmental and social risks and
potential liabilities; and opportunities. It is found that 1) Japanese firms
demonstrate the strongest performance; 2) financial sector demonstrates poor
performance in environmental and social risk management, which may be a
result of poor disclosure or the failure of financial institutions to recognize the
relevance of considering environmental and social risk; and 3) firms perform
well on environmental and social risk identification but poorly on management
(e.g., board responsibility).
ESP can also be a means of risk management for banking industry. For
example, Macve and Chen (2010) examine the roles that voluntary code
specifically - Equator Principles play in encouraging consideration of social and
environmental issues in project financing. They state that protecting the
environment is a by-product of banks risk management process. The Equator
Principles are a set of principles committing the signatory banks to finance only
projects that meet social responsibility criteria. Compliance with these criteria
should be good for the bottom line of the signatory banks, as well as good for
society as a whole (Heal, 2005).
However, environmental and social risk management is not just for financial
institutions but for all firms and their shareholders. According to a report
produced by the Global Reporting Initiative (2009),
Investors expect to see a discussion of the key risks and

opportunities associated with ESG strategies, and prefer to see this
consolidated into a single section of a report. ESG information
generally identifies firms key risks and opportunities linked to
corporate strategy and market trend, which can be helpful for
investors to make decision. (p.6)
Therefore, it can be stated that environmental and social issues enable firms
and their investors, to understand the risks and opportunities businesses face,
allowing enhanced risk management and security selection (Bassen and
Kovacs, 2008).
ESP and management quality
Greenwald (2009) finds that more and more firms treat environmental and
social issues as part of their firms strategy. Greenwald investigates the
38
relationship between environmental and social performance data and
management quality for a sample of US investment banks. The results show
that the US investment banks that survived in the credit crisis performed better
on environmental and social issues than those that didnt. According to
Greenwald, this perhaps surprising correlation suggests a strong indicator of
management quality: managements able to assess and mitigate longer-term
strategic risks to their business are also better equipped to cope with a crisis.
Greenwald (2009) finds that social dimension and corporate governance data
from the 5 investment banks were quite similar in 2006, including policies and
actual performance measures such as committee independence and
compensation ratios. However, environmental dimension reveals key
differences. He concludes that environmental factors do not have a significant
material link to the financial performance of companies in the short term.
However, these subtle differences in company reporting may provide important
signals concerning the seriousness with which ESG factors are taken by
management, thus impacting the long run performance of the firm.
ESP and competitive advantage
Jones (1995) develops a model that integrates economic theory and ethics.
Jones (1995) finds that firms conducting business with stakeholders on the
basis of trust and cooperation have an incentive to demonstrate a sincere
commitment to ethical behaviour. The ethical behaviour of firms in turn can
enable them to achieve a competitive advantage, because they will develop
lasting, productive relationships with these stakeholders.
Russo and Fouts (1997) examine CSR from a resource-based view of the firm
perspective. They argue that CSR, specifically environmental performance can
constitute a source of competitive advantage, particularly in high-growth
industries. They find a positive link between environmental performance and
firm operating profitability. They assumed this link to be mediated by the
unobserved superior environmental strategy which they conjectured to be
based on unique combinations of intangible (such as human, reputation,
technology) and tangible (such as financial reserves and physical equipment)
assets.
39
McWilliams and Siegel (2001) posit that CSR can be a differentiation strategy to
create new demand to command a premium price for an existing product
(service). Firms that seize an early opportunity to develop technologies in
anticipation of new environment issues such as climate change may offer a
lower risk profile and enhanced return opportunities to their shareholders
compared with their competitors. Furthermore, CSR may act as a vehicle for
innovation, which may provide a test of a product or service before launching
that product or service to a wider public (Kanter, 1999 cited by Husted, 2005). It
is also evident that CSR has a close relationship with R&D (McWilliams and
Siegel, 2000).
To sum up, environmental and social issues are important for firms to manage
potential risks and opportunities and their business performance; and for
investors to evaluate firms performance, especially business long-term viability.
2.4 Regulatory frameworks and policy guidelines of

environmental and social responsibility
In the following paragraphs, relevant regulatory frameworks and policy
guidelines regarding environmental and social responsibility reporting are
introduced. Many firms already provide environmental and social information
voluntarily. For example, they promote their environmental and social
accomplishments either in their annual reports and/or in a separate stand-alone
report. Firms in industries such as energy, forestry, and manufacturing use
similar reporting techniques as a means to answer their critics (Tschopp, 2005).
However, in the absence of legislative requirements governing the form of
environmental and social disclosures, there is an inherent degree of variation of
reporting styles. Nevertheless, there are some regulatory frameworks and policy
guidelines guiding firms environmental and social responsibility reporting such
as the AA1000 Assurance Standard, the Companies Act 2006 (about directors
duty) and the Global Reporting Initiative (GRI). These will be described in the
following paragraphs of this chapter.
40
2.4.1 International policy guidelines
2.4.1.1 The Institute of Social and Ethical Accountability (ISEA) AA1000AS

The AA1000 Assurance Standard launched on 25 March 2003 is the worlds
first assurance standard developed to ensure the credibility and quality of an
organisations public reporting on social, environmental and economic
performance (AA1000 Framework, 2003). The external audit process of a firms
sustainability report is mainly based on the AA1000, GRI guidelines, ISAE3000,
and/or Lloyds Register Quality Assurance. Assurance process involves
stakeholder interviews, comparing reports, and reviewing documentation
accuracy etc. For example,
Evaluate the nature and extent of adherence to the AA1000AS

principles of inclusivity, materiality and responsiveness and assure
the behaviour of the organisation as reported. United Utilities 2010
corporate responsibility report: Assurance section
Following a comprehensive multi-stakeholder revision of the 2003 standard, the
AA1000 Assurance Standard 2008 was developed. It provides a comprehensive
method of holding an organisation to account for its management performance
and reporting on sustainability issues by evaluating the adherence of an
organisation to the AccountAbility Principles and the reliability of associated
performance information. It requires the assurance providers to look at
underlying management approaches, systems and processes and how
stakeholders have participated. This enables them to evaluate the nature and
extent to which an organisation adheres to the AccountAbility Principles. The
assurance providers use the Principles as criteria when evaluating an
organisation. It provides findings and conclusions on the current status of an
organisations sustainability performance and provides recommendations to
encourage continuous improvement.
2.4.1.2 The UN Global Compact (UNGC)

The UN Global Compact (UNGC) is a strategic policy initiative for firms that are
committed to aligning their operations and strategies with ten universally
accepted principles in the areas of human rights, labour, environment and anti-
corruption. The ten principles are listed as follows (UNGC homepage):
41
Human Rights
Principle 1: Businesses should support and respect the protection of

internationally proclaimed human rights; and
Principle 2: make sure that they are not complicit in human rights abuses.
Labour
Principle 3: Businesses should uphold the freedom of association and

the effective recognition of the right to collective bargaining;
Principle 4: the elimination of all forms of forced and compulsory labour;
Principle 5: the effective abolition of child labour; and
Principle 6: the elimination of discrimination in respect of employment
and occupation.
Environment
Principle 7: Businesses should support a precautionary approach to

environmental challenges;
Principle 8: undertake initiatives to promote greater environmental
responsibility; and
Principle 9: encourage the development and diffusion of environmentally
friendly technologies.
Anti-Corruption
Principle 10: Businesses should work against corruption in all its forms,
including extortion and bribery.
The UNGC increased pressure on its signatories to report regularly on their
ESG achievements, and removed 394 of approximately 3775 signatories for
inadequate reporting (Ethical Performance, 2008). By complying with these
principles, firms demonstrate their commitment to their stakeholder
responsibility, and such firms are more likely to embrace environmental and
social activities as an issue addressing their organisations.
The Principles for Responsible Investment are the result of an initiative

brokered by the United Nations Environment Programme and the UN Global
Compact. Asset owners, investment managers and professional service
partners are invited to sign up to a set of six principles on environmental, social
and governance issues. The Principles for Responsible Investment (PRI)
provide impetus for investors to give greater consideration to ESG risks and
provide better disclosure of ESG matters (Gifford, 2009).
2.4.1.3 Global Reporting Initiatives Sustainability Reporting Guidelines

The Global Reporting Initiative (GRI) was launched in 1997 to develop a
globally accepted reporting framework (G3 guideline) and to enhance the
42
quality of sustainability reporting. The key aim of GRI guidelines is to improve
transparency, comparability and clarity. The GRI 2000 guidelines were revised
in 2002 and 2006. The most recent one (2006 GRI G3 guidelines) includes
three different types of disclosure guidance: strategy and profile; management
approach; and performance indicators.
Strategy and Profile: Disclosures that set the overall context for
understanding organizational performance such as its strategy, profile
and governance.
Management Approach: Disclosures that cover how an organization
addresses a given set of topics in order to provide context for
understanding performance in a specific area.
Performance Indicators: Indicators that elicit comparable information on
the economic, environmental and social performance of the organization
(p.5).
Reporting firms are encouraged to follow this structure in compiling their reports,
however, other formats may be chosen. According to Henriques (2010), GRI
reporting guidelines have been developed by a multi-stakeholder process,
which gives it a high degree of legitimacy, and set out the most highly regarded
and widely used set of environmental and social indicators. Compliance with the
GRI reporting guidelines is voluntary and these guidelines emphasise
environmental, social and economic disclosures. Accordingly, by complying with
these guidelines, firms demonstrate that they take their stakeholder
responsibility seriously.
Most firms sustainability reports are disclosed in the form of GRI framework.
According to a recent study by the Sustainable Investment Research Analyst
Network (2009), more than 80% of S&P 100 companies provide information
through sustainability websites; almost half produce a sustainability report; and
more than one-third make use of the GRI guidelines, the international standard
for environmental and social reporting. Worldwide, 77% of the worlds 250
largest firms use the GRI. Gifford (2009) states that GRI has pioneered the
development of the worlds most widely used sustainability reporting framework
and is committed to its continuous improvement and application worldwide. This
framework sets out the principles and indicators that firms can use to measure
and report their economic, environmental and social performance. Investors are
increasingly asking their investee companies to use GRI as a reporting
framework.
43
Based on GRI guidelines, a firms sustainability report generally includes the
following information;
About the report section briefly introduces the content of a firms

sustainability report;
CEO statement consists of business strategy, risks and opportunities
information;
Company information includes business services and products, culture,
vision and value, governance and company structure;
CR/sustainability strategy shows relevant CR strategy used or will be
used in the following year;
GRI G3 guidance - GRI table with key performance indicators including
economic, social and environmental information respectively;
Performance data contains past and/or future data with 5 years goals;
and most of them are quantitative information;
Stakeholder engagement and materiality sections;
Assurance (GRI guidelines recommend the use of external assurance for
sustainability reports in addition to any internal resources);
Contact us part provides information about a firm (e.g., media enquiry).
To sum up, AA1000AS, UN Global Compact and Global Reporting Initiatives

reporting guidelines are voluntary policy guidelines at international level.
According to Burchell (2008), in the UK, the Company Law Review and its
subsequent output (the Government White Paper on Company Law), attempted
to reach a compromise on the issue of non-financial reporting, by calling for
firms of a certain size to report on social and environmental issues. That is, if it
is 'material' to a firm's operations, then adequate pressure should be brought to
bear on firms to fully disclose their impacts. In the UK, there are some
regulatory requirements regarding environmental and social responsibility such
as Companies Act 2006 and Pension Funds Amendment Act 2001 which are
discussed in the following section.
44
2.4.2 Regulatory frameworks in the UK
2.4.2.1 Companies Act 2006 and Pension Funds Amendment Act 2001
UK Companies Act 2006 sec.417 (5) and (6) state that environment, employee,
social and community issues are the key areas a quoted company is required to
provide information about, using financial and/or non-financial key performance
indicators. The UK Companies Act suggests that companies should follow a
comply or explain approach to reporting of non-financial indicators in their
Business Review.
Sec.417 (5) In the case of a quoted company the business review must, to the
extent necessary for an understanding of the development, performance or
position of the company's business, include
(a) the main trends and factors likely to affect the future development,
performance and position of the company's business; and
(b) information about
(i) environmental matters (including the impact of the company's
business on the environment),
(ii) the company's employees, and
(iii) social and community issues,
including information about any policies of the company in relation
to those matters and the effectiveness of those policies; and
(c) subject to subsection (11), information about persons with whom the
company has contractual or other arrangements which are essential to
the business of the company.
If the review does not contain information of each kind mentioned in paragraphs
(b) (i), (ii) and (iii) and (c), it must state which of those kinds of information it
does not contain.
Sec.417 (6) The review must, to the extent necessary for an understanding of
the development, performance or position of the company's business, include
(a) analysis using financial key performance indicators, and
(b) where appropriate, analysis using other key performance indicators,
including information relating to environmental matters and employee
matters.
Key performance indicators means factors by reference to which the
development, performance or position of the company's business can be
measured effectively.
45
The Pension Funds Amendment Act 2001 is a new mandatory requirement for
UK pension fund trustees to disclose how they have considered social,
economic and environmental matters.
These are compulsory environmental and social related disclosure

requirements in the UK. It appears that UK government tends to attach greater
importance to environmental and social issues, especially in terms of calling for
environmental and social disclosures from institutional investors such as
pension fund trustees. Furthermore, it indicates that firms environmental and
social issues are important in evaluating firms business performance;
especially disclosures of their policies and performance related to employee,
community and environment are given greater importance. In addition,
according to a survey published by the Accounting Standards Board (FRC,
2007), it is found that there has been an increase of reporting on environmental,
employee and social issues; although very few companies discuss their
contractual arrangements and relationships in any depth.
2.4.2.2 Climate Change Act 2008

The Climate Change Bill was introduced into the Parliament of the UK on 14
November 2007 and became law on 26 November 2008. In March 2009, the
Climate Change Act Impact Assessment was updated to reflect the final content
of the Act. The key aims of the Climate Change Act 2008 are 1) to improve
carbon management, helping the transition towards a low-carbon economy in
the UK; 2) to demonstrate UK leadership internationally, signalling the
commitment of sharing responsibility for reducing global emissions in the
context of developing negotiations on a post-2012 global agreement at
Copenhagen in December 2009. The Climate Change Act 2008 sets a target for
the UK to reduce carbon emissions to 80% below 1990 levels by 2050. It also
sets an interim target of a 34% reduction by 2020 (with the potential to increase
this to a 42% cut given an international agreement). It has also established the
concept of carbon budgets. The Act creates a new approach to managing and
responding to climate change in the UK (Department of Energy and Climate
Change, 2009).
Overall, the regulatory frameworks in the UK such as Companies Act 2006,

Pension Funds Amendment Act 2001 and Climate Change Act 2008 are
46
mandatory requirements for UK firms to provide relevant information about their
environmental and social responsibility. However, since there is no clear
mandatory guideline about environmental and social performance
indicators/measurements, these regulatory frameworks appear to be the
minimum requirements in the UK. Hence, it is difficult for firms to follow and
provide relevant environmental and social information required by the wider
user groups. However, there are some voluntary frameworks or policy
guidelines providing environmental and social responsibility indicators in the UK
(e.g., Carbon Disclosure Project indicators), which will be introduced in the next
section.
2.4.3 Other frameworks and policy guidelines in the UK
2.4.3.1 Carbon Disclosure Project (CDP)

The Carbon Disclosure Project is an independent not-for-profit organisation
holding the largest database of primary corporate climate change information in
the world. Thousands of organisations from across the worlds major economies
measure and disclose their greenhouse gas emissions, water management and
climate change strategies through CDP. CDP put this information at the heart of
financial and policy decision-making (CDP website). CDP provides detailed
environmental performance indicators such as carbon emission or carbon
intensity. In Chapter 5, carbon emission data (scope 1 and scope 2) is collected
from CDP and is used to measure carbon eco-efficiency.
2.4.3.2 Department for Environment Food and Rural Affairs (DEFRA)

In September 2009, the Department for Environment Food and Rural Affairs
published Environmental Reporting Guidelines Key Performance Indicators
(KPIs) guidance for business and organisations to identify and address their
most significant environmental impacts, and to set targets/KPIs to measure
environmental performance. Transparency, accountability and credibility are the
three general principles of the KPIs. Quantitative nature, relevance and
comparability are the common requirements of the KPIs. There are 22 KPIs
considered to be significant to UK businesses. These are supplemented by
KPIs on supply chains and products. The KPIs include: 6 indicators of
emissions to air, 2 indicators of emissions to water, 5 indicators of emissions to
land, and 9 indicators of resource usage. There are 4 supplementary indicators
47
that measure business linked environmental impact such as supply chains,
products, biodiversity, environmental fines and expenditures.
2.4.3.3 Association of Chartered Certified Accountants (ACCA)

ACCA indicate that an ideal environmental report should consist of organisation
profile, environmental policy statement, targets and achievements, performance
and compliance, management systems and procedures and independent
verification statement. Compared to other environmental reporting countries like
US (toxic release inventory based reporting) and Sweden (product focused
reporting), UK adopts compliance and performance based reporting. In other
words, external regulations, companies environmental impacts and
performance improvement targets setting are important components of
environmental reporting. Furthermore, the ACCA UK Environmental Reporting
Awards set out some criteria to judge companies environmental reporting levels,
including completeness, credibility and communication, covering aspects like
environmental impact, policy, targets, management commitment, internal and
external credibility.
To sum up, above-mentioned guidelines only refer to environmental dimension

in the UK. Based on these voluntary guidelines, it can be seen that it is
important for firms to provide more quantitative performance information (e.g.,
environmental impact including water or carbon emission etc.). Furthermore, it
seems that only GRI provides the most comprehensive guidelines regarding
social indicators. In this thesis, I use two comprehensive data sets, providing
comparable and quantifiable indicators, namely Bloomberg environmental and
social disclosure scores and Asset4 environmental and social performance
scores, which will be explained in more detail at the end of this chapter.
2.4.4 Stock Exchange related and government reporting requirements

According to an EIRIS Report (2009), the London Stock Exchange requires
companies to disclose the following: relevant environmental, social, workplace,
and community information; to incorporate ESG disclosure requirements into
listing rules and corporate governance standards; to implement disclosure
requirements on a comply or explain basis; to support the requirement for a
resolution on a sustainability report; and to explore measures to encourage best
practice amongst firms (e.g., through sustainable indices). Based on such
48
disclosures, many rating agencies have developed comprehensive
environmental and social related indices such as Bloomberg and Asset4 that
are used in this thesis.
There is no doubt that stock exchanges currently play a key role in capital
markets through setting a benchmark for disclosure through their listing
requirements, ensuring liquidity and maintaining confidence and integrity in the
market (EIRIS, 2009).
As shown above, UK government and regulators increasingly expect and are

beginning to require carbon reporting. For example, the UK was the first country
to introduce mandatory carbon reporting (Papanicolaou et al., 2012). That is, all
companies listed on the Main Market of the London Stock Exchange were
required to report their annual levels of greenhouse gas ("GHG") emissions
from the start of April 2013.
Many other countries also require listed companies to provide ESG reporting.
For example, the French government was the first to require publicly traded
firms to include 40 social and environmental indicators in their reports to
shareholders in 2003. More recently, the Swedish government announced in
late 2007 that all 55 publicly traded firms in which it held ownership must begin
reporting by 2010 on the extensive set of social and environmental indicators
covered by the GRI guidelines. In addition, in early 2008 the Chinese
government announced that state-owned firms would be expected to begin
reporting their ESG records. Therefore, it is timely and relevant to study
corporate environmental and social responsibility in the current climate of rising
awareness of stakeholder responsibility.
49
Table 2.1 provides a summary of aforementioned frameworks.
Table 2.1 A summary of relevant frameworks

Framework International Guidelines/Requirements Mandatory/ E(S)D/
/UK Voluntary E(S)P
The assurance providers evaluate
the nature and extent to which an
organisation adheres to the
AA1000 International AccountAbility Principles. They Voluntary ESD
Assurance use the Principles as criteria to
Standard investigate the underlying
management approaches,
systems and processes and how
stakeholders have participated. It
provides findings and conclusions
on the current status of an
organisations sustainability
performance and provides
recommendations to encourage
continuous improvement.
Follow ten universally accepted
UN Global International principles in the areas of human Voluntary ESP
Compact rights, labour, environment and
anti-corruption; and report
regularly on firms ESG
achievements.
Report CEO statement such as
business strategy, risks and
opportunities; company
information (like business
ESD
Global International services and products, culture, Voluntary
Reporting vision and value, governance and
Initiative G3 company structure); sustainability
guideline strategy; key performance
indicator (including economic,
social and environmental
disclosure); performance data
(past and/or future data, 5 years
goals, most of them are
quantitative information);
stakeholder engagement and
materiality; and assurance (GRI
guidelines recommend the use of
external assurance for
sustainability reports in addition to
any internal resources.)
Require a quoted company to
Companies provide financial and/or non-
Act 2006 UK financial key performance Mandatory ESD
sec.417 (5) indicators related to
and (6) environmental, employee, social
and community issues; and follow
a comply or explain approach to
non-financial indicators in its
Business Review section.
50
Pension UK Require UK pension fund trustees Mandatory ESD
Funds to disclose how they have
Amendment considered social, economic and
Act 2001 environmental matters.
Set a target for the UK to reduce
carbon emission to 80% below
Climate UK 1990 levels by 2050, set an Mandatory EP
Change Act interim target of a 34% reduction
2008 by 2020, and established the
concept of carbon budgets. It
creates a new approach to
managing and responding to
climate change in the UK.
CDP UK Provide detailed environmental Voluntary EP
environment performance indicators such as
al carbon emission
performance
indicators
Provide 22 key performance
DEFRA UK indicators (KPIs) guidance for Voluntary ED
Environment business and organisations to
al Reporting identify and address their most
Guidelines significant environmental impacts,
and to set targets/KPIs to
measure environmental
performance.
Set out some criteria to judge
ACCA UK companies environmental Voluntary ED
environment reporting level. An ideal
al reporting environmental report should
guidelines consist of organisation profile,
environmental policy statement,
targets and achievements,
performance and compliance,
management systems and
procedures and independent
verification statement.
London UK Require companies to disclose Voluntary ESD
Stock relevant environmental, social,
Exchange workplace, and community
requirements information and to incorporate
ESG disclosure requirements into
listing rules and corporate
governance standards etc.
London UK All companies listed on the Main Mandatory ED
Stock Market of the London Stock
Exchange Exchange were required to report
requirements their annual levels of greenhouse
gas ("GHG") emissions from the
start of April 2013.
2.5 Environmental and social responsibility measures

In this section, various available corporate social responsibility indices will be
reviewed including those used in this thesis. These include environmental
51
and/or social responsibility measures from Bloomberg, Carbon Disclosure
Project and Asset4 databases.
According to Hammond and Slocum Jr. (1996), there are three different ways to
measure a firms performance on corporate social responsibility. First, experts
are asked to evaluate a firms corporate policies according to some established
criteria. However, the validity of this measurement resides in the expertise of
those persons making the assessments.
Second, researchers have used content analysis of corporate annual reports

and other documents to assess a firms social responsibilities (Friedman and
Miles, 2001; Prado-Lorenzo et al., 2009). The content analysis method is based
on a variety of disclosure frameworks (e.g., the most common one is the GRI
guidelines), and uses data from annual reports and/or sustainability reports. The
main advantage of this method is that it uses reasonably objective data, as now
there is computer-aided software such as Leximancer available to help codify
qualitative materials. However, the choice of variables is subjective.
A third method is to use existing indices. In order to measure the level of social
information reported, a widely used method called indexing has been adopted
(Wallace and Naser, 1995). Indexing involves checking information disclosed
against a list of information items. A score is then awarded depending on
whether an item is disclosed or not, and a total score is derived for each firm.
Hence, the index method is a model that combines several disclosure items into
a single measure. Owusu-Ansah (1998) mentions that this approach has
several advantages: it is capable of rank ordering companies in terms of their
disclosure scores. Furthermore, Wallace and Cooke (1990) state that as a
score of an index can be treated as a variable to which both parametric and
non-parametric methods can be applied, indexing approach allows carrying out
suitable statistical analysis. For example, Parsa and Kouhy (2008) show that
the European Commission categorises corporate social responsibility into eight
aspects: 1) workplace issues, 2) human rights, 3) impact on the community, 4)
reputation, branding and marketing, 5) ethical investment, 6) environment, 7)
ethics and corporate governance, and 8) health and safety (CSR Europe, 2003).
Some of these items are divided into subcategories, giving rise to a total of
eighteen social information items of the index. An item was scored one if it is
52
disclosed, and zero otherwise. A relative scoring procedure is established with
disclosure scores calculated by dividing the actual score of a firm by its total
maximum possible score (TMS). The relative index score (RIS) for each firm is
the ratio of the actual number of items disclosed (AS) to the total maximum
score potentially awarded (TMS). This approach provides the benchmark to
compare/rank corporate social responsibility and enables to conduct statistical
analysis.
2.5.1 Development of environmental and social responsibility indices

The early CSR index was developed by Moskowitz (1972), which he updated
over several years (based on the surveys evaluated by Moskowitz and a panel
of businessmen and MBA students). This index has been widely used in early
CSR studies (Bowman and Haire, 1975; Cochran and Wood, 1984). However,
Moskowitzs index is only one-dimensional CSP measurement.
It is followed by the Council on Economic Priorities rankings (CEP, 1977) which

focus on the investigations of pollution control records of the largest companies
in five highly polluting industries. Each company's social performance is
objectively measured by eleven issues: environment, charitable giving, women
in management, minority management, animal testing, information disclosure,
community outreach, South Africa, family benefits, military work and nuclear
involvement. Although scholars have used the CEP ratings broadly (e.g., Fogler
and Nutt, 1975; Spicer, 1978; Freedman and Jaggi, 1982), some issues like
animal testing, South Africa and family benefits are not commonly used in
developing CSR index today.
Carroll (1979) proposed a new corporate social performance model - a three-

dimensional model of corporate social performance, including social
responsibilities (i.e., economic, legal, ethical and discretionary responsibilities),
six social issues (consumerism, environment, discrimination, product safety,
occupational safety and shareholders) and social responsiveness philosophy.
Carrolls multi-dimensional model of CSP is easy to understand and has an
intuitively appealing logic, which is most durable and widely cited in the
literature. However, Carrolls model gives top priority to the economic dimension
as an aspect of CSR, and the major problem is that social issues change and
they differ for different industries. Prior studies investigate the relationship
53
between institutional ownership and firms corporate social performance. For
example, Coffey and Fryxell (1991) adopt Carroll multidimensional CSP
measurement and find that there is no relationship between institutional
ownership and charitable giving, but a positive relationship between number of
women on the board and institutional investment. They suggest that in 1984
institutional investors were fairly indifferent to social criteria. They also provide a
possible explanation of the positive link between number of women on the
board and institutional investment as institutional investors actually advocate
board diversity, perhaps based on beliefs that it will improve firm performance
(p.442).
McGuire et al. (1988) developed the Fortune magazines rating of corporate

reputation, with eight attributes: quality of management, quality of products and
services offered, innovation, value as a long-term investment, soundness of
financial position, ability to attract and retain talented people, responsibility to
the community and the environment, and wise use of corporate assets.
Reputation indices are based on the assumption that CSP reputations are good
reflections of underlying CSP values and behaviours. Since this index is based
on surveys, it is very difficult to convert above attributes into quantifiable
variables, and it is only applied in the US companies.
Another index called New Consumer Group ratings was developed by Adams et
al. (1991). This is the only index that differentiates CSR disclosure and
performance, which includes CSR disclosure as one of firms CSR performance
indicators. The 13 ratings produced by NCG include 4 main elements - CSR
disclosure, womens position, ethnic minorities position, philanthropy and
environmental actions. The main issue is that the NCG index only focuses on
consumer sector. Sectors such as financial services and media related products
are not included, which is due to the difficulties associated with the assessment
of CSR performance.
KLD, EIRIS and CKRG have developed more complex indices using a variety of
surveys and other data sources. More recent corporate social responsibility
studies use KLD data. This index is compiled by an independent rating service
which focuses on a wide range of firms over a broad spectrum of CSR screens.
This database rates companies on 13 dimensions of CSR including community,
54
corporate governance, diversity, employee relations, environment, human rights,
product quality and safety, alcohol, firearms, gambling, military, nuclear power
and tobacco. Each dimension in the KLD database is summarized in terms of
strengths (positive values) and concerns (negative values). A firm is given a
score of 0 or 1 across each strength or concern. KLD based CSP index is
widely accepted by practitioners and academics as an objective measurement.
According to Callan and Thomas (2009), two of the more prominent aggregate
measures used in academic studies are: the Fortune ratings data; or the indices
formed from social attributes provided by KLD, with more recent studies
gravitating toward the use of KLD data. Waddock and Graves (1997), for
example, believe that the KLD indicators are superior to the Fortune data
because the latter are more about a firms overall management than its socially
responsible decisions. Furthermore, Chand (2006) asserts that a KLD-based
index offers more objectivity than a measure based on Fortunes survey data.
However, KLD data is only applied for US studies. Graves and Waddock (1994)
use KLD data to measure firms CSP, and find a positive link between
institutional investors stock preferences and socially responsible performance.
They suggest that the preference is due in part to the long-term performance of
the investment. They also argue that CSR adds value to the organisation over
the long term, attracting, in turn, leading institutional investors.
However, it is argued by Humphrey et al. (2012) that it is not appropriate to

calculate an overall CSP score as the total number of strengths minus the total
number of concerns. If a firm is engaged in business practices that involve
hazardous waste, this activity will be scored 1 under concern. This will lower
the firms overall CSP score. If another firm is not engaged in practices that
involve hazardous waste, it will receive 0 and thus hazardous waste will not
contribute to the firms overall score. Furthermore, Humphrey et al. (2012)
mention that there are several issues of KLDs rating systems. Take hazardous
waste production as an example. First, the binary ratings do not distinguish
between the levels of hazardous waste production. Second, firms in heavy
polluting industries like Oil and Gas have lower KLD score than other firms that
have very limited or no disclosure to producing hazardous waste, regardless
how well the firm manages its hazardous waste. Third, the number of measures
within each of KLDs dimensions can skew overall CSP scores. Take
55
environmental dimension as an example - a firm has a total of 5 strengths and
10 concerns. By definition, the KLD ratings system is biased toward a higher
concern score for those industries disclose information about their
environmental concerns.
In the UK, the most commonly used CSR index is Ethical Investment Research
Service (EIRIS) CSP rating. Cox et al. (2004) use EIRIS data to measure CSP
for a sample of UK firms and find that long-term institutional investment is
positively related to firms CSP. EIRIS uses information such as annual reports
and company publications, in addition to direct surveys of sample companies, to
develop a set of relatively objective criteria relating to corporate social impacts
and their management. The data is in the form of a searchable database with
about 170 questions covering the whole range of social concerns, including
environment, employee, community and society, human rights and supply chain.
Due to data availability issue, some scholars only include the first three aspects
of CSP as corporate social performance measurement (i.e., environment,
employee and community). Comparing EIRIS with Bloomberg or Asset4 ESG
databases (both of which will be discussed below), the latter two datasets (i.e.,
both Bloomberg and Asset4) are of better quality and are significantly more
detailed than the ratings data available from EIRIS. Bloomberg provides 100
data points and Assets4 has 250 key performance indicators. Similar to KLD,
EIRIS do not distinguish between general and industry-specific ESG criteria. In
addition, the ESG scores of Bloomberg and Asset4 range from 0 to 100, which
improves on EIRIS granular 0 to 3 CSP rating scale (Humphrey et al., 2012).
Recently, the Global 100 Most Sustainable Companies rating developed by the
Canadian research firm CKRG has been released. This index consists of 10
KPIs and a transparency indicator: energy productivity, carbon productivity,
water productivity, waste productivity, leadership diversity, CEO-to-average
worker pay, % tax paid, sustainability leadership, sustainability remuneration,
innovation capacity and transparency. The CKRG Global 100 index is based on
a group of data providers including Thomson Reuters and Bloomberg. The key
advantage of this index is: ESG data is industry adjusted and integrated with
financial data to enhance analysis.
56
To sum up, there are both advantages and drawbacks of previous CSR
measurements (See Appendix 1 for details). It can be seen that some early
studies tend to focus on only one or few areas of CSR. It seems difficult to
construct a truly representative CSR measure because of its complexity.
Measurement of a single dimension provides too limited perspective on how
well a company is actually performing in the relevant social domains (Lydenberg
et al., 1986; Wolfe and Aupperle, 1991). However, a variety of relevant/common
dimensions have been identified from aforementioned indices, such as
indicators related to employees, community relations, issues concerned with
women and minorities, environmental responsibility and product safety. Some
researchers construct CSR measurement from different stakeholders
perspectives, namely employees, customers, communities and environment.
Margolis and Walsh (2001) have reviewed ninety-five empirical studies that
examine the link between CSR performance and financial performance. The
ninety-five studies use twenty-seven different data sources to assess CSR
performance, while environmental practices are the most commonly evaluated
aspect of CSR performance, followed by community investment and human
resources.
In conclusion, some consistent criteria for developing a reliable CSR index are
needed. First, CSR index should be suitable for cross-industry studies. Second,
it should reflect some important aspects of CSR. Third, it should be possible to
convert multidimensional CSR into quantifiable indicators. Finally, reliable and
comparable data must be available from companies reports or websites. This
thesis uses unique databases that meet above criteria. In the following
paragraphs, Bloomberg, Carbon Disclosure Project and Asset4 environmental
and social responsibility measures used in this thesis are introduced.
2.5.2 Bloomberg ESD measures

Bloomberg provides a comprehensive index including environmental, social and
governance (ESG) disclosure scores (see Appendix 2 for details). It has
researched 20,000 firms around the world and found ESG data disclosed by
4100 firms in 52 countries4. For each firm, Bloomberg has developed ratios and
4
Use command BESGPRO <index> DES <go> then MEMB <go>, it is found that firms may not have disclosed all 3
areas. Currently, there are 4077 firms processed for ESG information on a monthly basis. As of 25/02/2011, there
are 625 companies in the FTSE all share index provide some ESG information.
57
KPIs to better compare and analyse firms on ESG metrics. Furthermore,
Bloomberg seeks to be a standard-setter in the area through relationship with
major non-governmental and not-for-profit organisations (e.g., GRI, UNGC and
Ceres). The ESG scores measure firms environmental, social and governance
disclosures, capturing the level of firms transparency related to its non-financial
performance and governance.
Bloomberg collects 100 different data points related to ESG. For each firm,
Bloomberg then develops a score that ranges from 0 for firms that do not
disclose ESG data to 100 for those that disclose every data point collected by
Bloomberg. ESG data is collected from companysourced filings (e.g., CSR
reports, annual reports, company websites, and a Bloomberg survey that
requests data from companies). According to Bloomberg, none of the data is
estimated or derived; every data filed has transparency back to a company
document. If a firms disclosure is not covered by ESG data points or
companies do not disclose anything, then they will be marked as N/A.
Furthermore, since weights assigned to different ESG factors are not constant
across industries, the score is adjusted by industry and weighted by importance.
In other words, each firm is only evaluated in terms of the data that is relevant
to its industry sector. For example, a data point like Phones Recycled is only
considered in the score for Telecommunications firms and not for other sectors.
Similarly, Gas Flared only goes into computing the disclosure score for oil and
gas exploration and production firms, while companies in other sectors are not
penalized for not disclosing it. Data point such as Greenhouse Gas Emissions
or Number of Independent Directors carries greater weight than other disclosure
items, which is decided by ESG practitioners. In addition, the score is then
expressed as a percentage, making firms comparable both within and across
industry sectors. Hence, the features of Bloomberg ESG disclosure scores meet
the above-mentioned criteria of a reliable CSR index, that is, these are
comparable across companies and industries; are quantifiable; are based on
reliable data; and reflect timely and relevant aspects of CSR.
The environmental E score covers various types of environmental information

that could broadly be classified as hard items and soft items. Hard items
include data points like Carbon/GHG emissions, energy/water consumption,
waste recycled, investments in sustainability and ISO certification, among
58
others. Soft items include firms environmental policies and initiatives such as
waste reduction policy, energy efficiency policy and green building policy,
among others. It can be seen from Appendix 2; approximately 80% of E items
covered are hard data items, while only 20% of them (12 out of 60) are soft data
points. Thus, the environmental score largely measures a firms hard
environmental disclosure, which Clarkson et al. (2008) suggest, would be
difficult for poor environmental performers to provide. Thus higher E score
would denote more environmentally responsible disclosure.
The social S score developed by Bloomberg mostly covers reporting of issues

related to human resource relations such as employee health and welfare, as
well as their training and development including training in CSR. The S score
also covers disclosure of issues of equality and diversity in employment,
community spending and human rights. Based on the type of information
covered, about 70% of social score is based on hard items while soft
information makes up about 27% of the score (7 out of 26 data points). Thus the
higher a firms S score, the more inclined it is to be socially responsible.
2.5.3 Carbon emission data

UK firms carbon emission data is available from the Carbon Disclosure Project
website and published reports. As mentioned in section 2.4.3.1, the Carbon
Disclosure Project (CDP) is an independent not-for-profit organisation working
to drive greenhouse gas emissions reduction and sustainable water use by
business and cities. Thousands of firms report their greenhouse gas emissions,
water management and climate change strategies through CDP every year. The
CDP then produces annual reports which analyse these responses, submitted
through investors, supply chain, public procurement and cities programs. Hence,
every year CDP publishes a number of analytical reports written by CDP partner
organisations and provides detailed analysis of the responses indicating
important trends and development, including the FTSE350 report. The
FTSE350 report provides carbon emission data for FTSE350 companies,
including aggregated carbon disclosure score, scope 1, scope 2, scope 3, and
total carbon emission data. It can be used to work out carbon intensity (the ratio
of carbon emissions to total sales in local currency). The reports released in
recent years also provide information related to CDPs verification (e.g., Year
2011). However, due to data availability, only year 2008 and 2009 emission
59
data was available when the data for this study was being collected in 20105.
Hence, this study uses data only for these two years.
2.5.4 Asset4 ESP measures

Asset4 a database of Thomson Reuters, provides environmental, social and
governance performance information, which is primarily used by professional
investors and corporate executives. It provides objective, relevant and
systematic ESG performance information. A team of over 130 experienced
analysts collect 900 ESG evaluation points per firm, which is used to calculate
250 key performance indicators. Each data point goes through a multi-step
verification process, including a series of data entry checks, automated quality
rules and historical comparisons. Data sources include stock exchange filings,
CSR and annual reports, non-governmental organisation websites and various
news sources. Primary data used are objective and publically available.
There are 18 categories of key performance indicators within four pillars,

namely Economic (3 categories), environmental (3 categories), social (7
categories) and governance (5 categories). Only environmental, social and
governance pillars are relevant for the analysis in this thesis. The environmental
score as defined by Asset4 measures a company's impact on living and non-
living natural systems, including the air, land and water, as well as complete
ecosystems. It reflects how well a company uses best management practices to
avoid environmental risks and capitalize on environmental opportunities. It
covers hard performance indicators (as classified by Clarkson et al., 2008)
such as information on energy used, CO2 emissions, water and waste recycled,
and spills and pollution controversies. Hence, the aggregate environmental
score measures a firms environmental performance. The social score as
defined by Asset4 measures a company's capacity to generate trust and loyalty
with its workforce, customers and society, through its use of best management
practices. It covers issues like employee turnover, accidents, training hours,
donations, and health and safety controversies. Social score also covers mostly
hard performance indicators and hence is an objective measure of the social
5
I also use Bloomberg to check carbon data availability. Use command CEDL <go> to check all companies submitted
emission data to CDP, it is found that there are 2588 companies in the UK exchange market submitted emission
data, but only 208 companies provide carbon information in 2006/2007/2008.
60
performance of a firm. Table 2.2 shows the pillars and sub-categories of ESG
scores from Asset4.
Table 2.2 ESG pillars and sub-categories (2002-2010)

Pillars Sub-categories
Environment score (ENVSCORE) The environmental pillar
measures a company's impact on living and non-living natural Emissions reduction
systems, including the air, land and water, as well as complete Resource reduction
ecosystems. It reflects how well a company uses best Product innovation
management practices to avoid environmental risks and capitalize
on environmental opportunities in order to generate long-term
shareholder value.
Social score (SOCSCORE) - The social pillar measures a Employment quality
company's capacity to generate trust and loyalty with its workforce, Health & Safety
customers and society, through its use of best management Training & Development
practices. It is a reflection of the company's reputation and the Diversity
health of its license to operate, which are key factors in determining Human rights
its ability to generate long term shareholder value. Community
Product responsibility
Governance score (CGVSCORE) - The corporate governance
pillar measures a company's systems and processes, which Board structure
ensure that its board members and executives act in the best Board function
interests of its long-term shareholders. It reflects a company's Compensation policy
capacity, through its use of best management practices, to direct Shareholder rights
and control its rights and responsibilities through the creation of Vision & Strategy
incentives, as well as checks and balances in order to generate
long-term shareholder value.
Note: Datastream code is presented in parentheses.
From Table 2.2, it can be seen that E, S and G pillars measure firms
environmental, social and governance performance respectively. Asset4 ESG
data can be obtained from Datastream. The ESG data is available from 2002
onwards. Firms with no Asset4 ratings are excluded from the study in Chapter 6.
This limitation of the analysis is discussed in further detail in the relevant
chapter.
Asset4 provides more comprehensive calculation of the rating scores. Key

performance indicators, categories, pillars and overall score are equally
weighted computer calculations of relative company performance, the
benchmark being the Asset4 company universe. These ratings are Z-scored
and normalized to position the score between 0 and 100%. The Z-score is a
relative measure comparing one company with a given benchmark. It expresses
the value in units of standard deviation of that value from the mean value of all
companies. Among other things, this allows to create more distinction between
values that otherwise might be very close together (Asset4 document). A
61
number of prior studies adopted Asset4 ESG dataset to measure firms
environmental, social and governance performance (e.g., Ioannou and Serafeim,
2012; Kocmnova et al., 2011; Chen et al., 2012; Lam et al., 2012; Cheng et al.,
2012; Wimmer, 2012).
Table 2.3 provides the definition and measurements of board attributes and
CSR strategy variables used in Chapter 6.
Table 2.3 A break-down of governance pillar (Asset4 data fields)

Category Definition/Measurement DS Code
Percentage of Independent Board Members (%) Percentage
expressed numerically of independent board members as
reported by the company (whereas the company stipulates CGBSO07V
Board that there is no significant institutionalised interest link
Structure between the company or the executives and the
and independent board members).
composition Board Diversity (%) -Percentage of women on the board of CGBSO17V
variables directors.
CEO-Chairman Separation (Y/N) Does the CEO CGBSO09V
simultaneously chair the board?
Audit Committee Expertise (Y/N) Does the company have
an audit committee with at least three members and with
one of those members being considered a "financial expert" CGBFO03V
within the meaning of Sarbanes-Oxley given his or her
extensive experience in accounting and auditing matters?
Integrated Vision and Strategy Challenges and
Opportunities (Y/N) Is the company openly reporting about CGVSDP016
the challenges or opportunities of integrating financial and
CSR related extra-financial issues, and the dilemmas and trade-offs it
vision and faces?
strategy CSR Sustainability Committee (Y/N) Does the company CGVSDP005
variables have a CSR committee or team?
CSR Sustainability Report Global Activities (Y/N) Does the CGVSDP029
company's extra-financial reporting take into account the
global activities of the company?
CSR Sustainability External Audit (Y/N) Does the company CGVSDP030
have an external auditor of its CSR/H&S/Sustainability
report?
GRI report guidelines (Y/N) Is the companys CSR report CGVSDP028
published in accordance with the GRI guidelines?
2.6 Conclusions
In conclusion, this chapter provides an introduction and some background
knowledge about environmental and social responsibility. Relevant theoretical
underpinnings and regulatory frameworks/policy guidelines are described.
Furthermore, ESD and ESP measures used in this thesis are introduced. The
62
interrelationship among corporate environmental and social responsibility,
governance systems and financial performance are reviewed in Chapter 3.
63
Chapter 3: Environmental and social responsibility, corporate
governance and firm performance
3.1 Introduction
In the previous chapter, I discussed the theoretical frameworks and policy
guidelines relating to environmental and social responsibility. I review in this
chapter first, the extant empirical literature on the link between environmental
and social responsibility and firm financial performance (which are the topics
studied in the empirical chapters 4 and 5 of this thesis). I then review the
studies grounded in the management and corporate governance literature, on
the link between environmental and social performance and the board of
director characteristics (the topic that I investigate in Chapter 6).
3.2 Environmental and social responsibility and firms financial

performance
A substantial body of literature has examined the link between being green (i.e.,
being environmentally and socially responsible) and generating green (i.e.,
generating profits), such as recent studies by Al-Tuwaijri et al. (2004), Clarkson
et al. (2011), Callan and Thomas (2009), Brammer and Millington (2008),
Dowell et al. (2000) and McWilliams and Siegel (2001). Yet, the evidence
concerning this link remains inconclusive at theoretical and empirical levels. For
example, Margolis and Walsh (2001) review 122 published studies between
1971 and 2001 and revisit the relation between corporate social responsibility
and financial performance. Their review reveals that prior studies use many
different approaches such as structural equation modelling, event study,
regression analysis and case study. They find when CSR is an independent
variable in 80 of the 95 studies, the majority of results point to a positive
relationship between CSR and financial performance, namely 42 positive
studies (65%), 4 negative studies (6%) and 19 neutral studies (29%). When
CSR is a dependent variable in 19 of 95 studies, the majority of results point to
a positive relationship, with 13 positive studies (68%), 3 neutral studies (16%)
and 3 mixed result studies (16%).
Siegel (2009) argues that environmental and social responsibility should be

viewed as an investment decision, and thus should be evaluated in a rational,
calculative fashion. Siegel posits that managers should not adopt green
64
management practices because of societal pressure alone, but rather because
it advances their organisations strategic goals such as increase of their market
values. In other words, firms should choose to be socially responsible to align
their shareholders interests with other stakeholders interests, which in turn will
increase firms productivity, share price and market share, reduce potential
competition and enhance human capital/work quality. Based on Siegels
argument, firms should choose to be green only if it yields more green. Indeed,
Clarkson et al. (2011) find that it pays to be green.
There are a number of limitations in the green literature that might explain the
mixed results of prior work. First, as Clarkson et al. (2010) point out, work in this
area suffers from measurement and methodological problems. In terms of
measurement, given the absence of clear mandatory guidelines as to what firms
should report in terms of their corporate social responsibility (CSR), how studies
measure CSR in this area varies greatly (Callan and Thomas, 2009). Second,
given the data limitations of most prior work in this area: 1) using either cross-
sectional samples (e.g., Callan and Thomas, 2009; Al-Tuwaijri et al., 2004); 2)
limited industry samples (e.g., Clarkson et al., 2011 covering only 4 industries);
3) samples selected on the basis of meeting certain threshold criteria (e.g., Al-
Tuwaijri et al., 2004, requiring companies in their sample to meet certain criteria
relating to exposure to future environmental costs); not only does generalisation
remain difficult, but even causality testing remains a challenge. Finally, as a
number of authors including Ullmann (1985), and more recently Gray et al.
(1995) comment, the literature remains unclear at a theoretical level as to why
environmental and social responsibility, given that they are largely non-financial
in nature, should matter for various measures of a firms financial performance.
For example, Ullmann (1985) provides a systematic review of the relations
among social performance, social disclosure and economic performance, and
indicates that inconsistent findings result from a lack of theory, inappropriate
definition of key terms and deficiencies in empirical data currently available.
In the following section, prior studies regarding the three sets of relations as
mentioned by Ullmann 1985 are reviewed. First, the link between environmental
and social performance (ESP) and corporate financial performance (CFP) is
discussed. Second, research on the relationship between ESP and ESD is
65
addressed. Finally, existing literature about the association between ESD and
CFP is reviewed.
3.2.1 Relations between ESP and corporate financial performance (CFP)

The most dominant CSR research perhaps is the investigation of the link
between ESP and CFP. Different methodologies have been used in prior
studies. Generally speaking, existing literature indicates three different methods.
First, event studies examine the mean stock returns of firms around release of
CSR news. Second, portfolio studies compare firms financial performance
between CSR responsible firms and non-responsible firms. Third, regression
analyses investigate the relation between ESP and CFP. Although studies use
regression analyses (i.e., the third type), different ESP and CFP measures are
used. For example, some studies test the influences of environmental and
social performance on market based financial performance such as Q ratio or
cost of capital (e.g., Clarkson et al., 2010). Some other studies apply
accounting-based measurement of financial performance such as ROA, ROE
and ROS (e.g., Callan and Thomas, 2009). The measurements of
environmental and social performance also vary. For most US and Canadian
studies, KLD is the main data source to measure firms ESP. In the UK, there is
limited ESP data available such as EIRIS and Asset4. In this thesis, I use
Asset4 environmental and social scores to measure a firms environmental and
social performance.
In the following paragraphs, I will review separately the link between ESP and
operating profitability, as well as ESP and market related performance in
chronological order (although some studies use both as financial performance
measures). Then review prior studies related to causality of this link.
3.2.1.1 Prior studies on the ESP-CFP link

ESP and operating profitability
As mentioned at the beginning of this chapter, a number of studies over the

years have examined the link between various measures of environmental and
social performance and operating profitability. The most recent studies are
reviewed below.
66
Callan and Thomas (2009) use KLD data to examine the relationship between
corporate social performance and its financial performance including four
different financial performance measures, namely ROA, ROS, ROE and Tobins
Q i.e., Q ratio. When financial performance is the dependent variable, they find
a positive link between financial performance (measured as ROA, ROS or
Tobins Q) and corporate social performance. They suggest that ROE is more
suitable for long-term analysis, while Tobins Q appears to be a useful measure
of financial performance in CSR analyses. In chapter 4, I use ROS and ROE as
profitability measures (independent variables) and in chapter 5 Q ratio is used
as market performance measure (dependent variable).
Evans and Peiris (2010) examine the relationship between environmental social
governance (ESG) factors and financial performance (both operating profitability
and market performance) of US listed companies. Consistent with stakeholder
theory, they find aggregated ESG rating is positively related to both ROA and
MTB ratio. At disaggregated level, they find a significant positive link between
particular ESG rating criteria and both return on assets and market to book
value measures. In particular, they find that employment conditions are a more
relevant influence than other stakeholder criteria, and a companys involvement
in more general non-stakeholder related social issues (e.g., community relations)
contributes negatively to both operating performance and stock return. Based
on their findings, employee (key stakeholder) related social performance
appears to be important for a company, as it can lead to higher operating profit
and market return.
Guenster et al. (2011) investigate the association between firms eco-efficiency

and their financial performance measured as ROA and Tobins Q. Using a new
database of eco-efficiency scores (the eco-efficiency score reflects a firms
environmental performance) from 1997 to 2004, they find that eco-efficiency is
positively related to operating performance and market value. Furthermore, they
argue that the use of Tobins q is adequate when analyzing corporate
environmental performance, as it reflects reputational effects, investor trust and
investor risk.
Busch and Hoffmann (2011) investigate the link between climate change/carbon
emissions and financial performance measured by ROA, ROE and Tobins Q
67
respectively. Focusing on climate change, they developed a set of questions
that cover a firms carbon emissions and carbon management strategies. They
use a firms carbon intensity, measured as the ratio of the total GHG emissions
(Scope 1 and Scope 2 in tons) to a firms sales (in US$), as the outcome based
environmental performance measurement. Regarding the process-based
environmental performance measurement, they use the aggregated score of 13
questions from the questionnaire. They find a negative relation (with respect to
Q ratio or ROE) when using carbon management as a process-based
measurement. However, as an output-based measurement, environmental
performance is positively linked with Q ratio.
Using longitudinal data from 1990-2003 for the four most polluting industries in
the US, Clarkson et al. (2011) study the determinants and consequences of
proactive environmental strategies. First, they investigate the factors effect a
firms decision to adopt a proactive environmental strategy. Second, they
examine whether pursing proactive environmental strategies can lead to better
financial performance (ROA). Finally, by using 3SLS regression analysis, they
test potential endogeneity between a firms environmental performance and
financial performance (equivalent to Q ratio). Clarkson et al. (2011) adopt
resource-based view of the firm and argue that firms with unique scarce
resources such as superior managerial capability and financial resources can
gain sustainable competitive advantage. Managerial capability is captured by
R&D intensity, sales growth and enterprise value to assets, and financial
resources are measured by ROA, operating cash flows and leverage. They find
that positive changes in firms financial resources in the prior periods lead to
significant improvements in firms relative environmental performance in the
subsequent periods. Furthermore, they find that significant improvements in
environmental performance in prior periods can lead to improvements in
financial performance (ROA) in the subsequent years after controlling for the
influence of Granger causality. The result of 3SLS test shows that there is
endogeneity between environmental performance and financial performance (Q
ratio). Finally, they suggest that it pays to be green; however, only firms with
sufficient financial resources and management capabilities can pursue a
proactive environmental strategy.
68
To sum up, prior studies examining the link between corporate social
performance and operating performance, show mixed results (e.g., Busch and
Hoffmann, 2011). Moreover, there are some methodological limitations of the
above studies. For example, some use either cross-sectional samples (e.g.,
Callan and Thomas, 2009) or limited industry samples (Clarkson et al., 2011).
Furthermore, most prior studies focus on environmental performance only (e.g.,
Guenster et al., 2011; Busch and Hoffmann, 2011). However, the link between
ESP and operating performance is widely studied, while the link between ESD
and firm financial performance is under examined. In Chapter 4 I not only
examine the link between ESD and firm operating profitability, but also use a
pooled cross-sectional and time series sample including all non-financial
industries to investigate the link between a firms environmental (as well as
social) disclosure and its operating performance. Hence, I address the under-
researched link between ESD and profitability as well as address the
methodological limitations of the ESP-CFP literature.
ESP and market related performance
The question of whether being socially responsible has any capital market
implications, has been addressed by a number of studies. According to Ullmann
(1985), socially responsive firms should outperform nonresponsive or less
responsive ones, in terms of better market performance which should be
reflected in the firm's stock price and attached systematic risk. In the following
paragraphs, a number of prior studies examining the link between ESP and
market related performance (including firm risk, cost of capital, annual return
and Q ratio) are reviewed.
Firm risk and cost of capital
Prior empirical studies attempt to investigate the relationship between corporate

social performance and various firm risks. For example, Orlitzky and Benjamin
(2001) define firm risk in terms of the variability of returns and they find a
negative relation between social performance and subsequent firm risk.
There are two types of risk associated with a firms stock: systematic risk and
unsystematic or business risk (Weston and Brigham, 1981). Normally, business
risk is irrelevant to financial theory, because a diversified portfolio of securities
69
can reduce and even eliminate business risk. However, a firm that successfully
manages its business risk can provide above-normal returns to shareholders in
the form of increased cash flows (Amit and Wernerfelt, 1990). Husted (2005)
finds that the more proactive the CSR projects of the firm, the lower the ex-ante
downside business risk of the firm. Husteds finding helps firms deal with ex
ante downside business risk, which is dramatically different from most prior
CSR-risk studies.
Lee and Faff (2009) examine the relationship between corporate sustainability
performance and idiosyncratic risk from a global perspective. They find that
firms with better corporate social performance exhibit significantly lower
idiosyncratic risk which is priced by the broader global equity market.
Petersen and Vredenburg (2009) attribute the positive ESP-CFP link to four
general areas: risk mitigation, generating market opportunities, accruing capital
market advantages and serving as a proxy for quality management. Regarding
risk mitigation, they state that CSR performance can be a form of insurance to
hedge risks, reducing the exposure of the respective firms to specific risks. The
mitigation of these risks is considered as value adding and therefore has a
positive impact on financial performance.
Salama et al. (2011) use a sample of UK FTSE 350 firms covering 1994-2006
to investigate the link between corporate environmental performance and firm
risk. Firm risk is measured by using beta, and corporate environmental
performance is measured by using the Community and Environmental
Responsibility Ranking from the Britains Most Admired Companies survey.
They find that a firms environmental performance is inversely related to its risk
an increase of 1.0 in a firms environmental performance score is associated
with a 0.02 reduction in its risk.
Recently, Gregory et al. (2011) adopt Linder Lydenberg Domini (KLD) data as
CSR performance measure and find better CSR firms have a lower cost of
capital and may have a lower expected adverse cash flow shocks. Their
analysis of realized returns provides some evidence of lower beta and book-to-
market exposure among high CSR stocks.
70
Annual return and Q ratio
Some researchers theorize that firms with unique scarce resources such as
superior managerial capability (e.g., with ability to develop superior CSR
strategies) and financial resources can enhance their competitiveness, which
could lead to better market performance (Al-Tuwaijri et al., 2004; Lo and Shue,
2007; Clarkson et al., 2011).
Based on this logic, Al-Tuwaijri et al. (2004) examine the relations among
environmental disclosure, environmental performance and economic
performance. Following Ullmanns (1985) suggestion that managements overall
strategy can affect economic performance, environmental performance and
environmental disclosure simultaneously, Al-Tuwaijri et al. (2004) recognize the
potential for endogenous relations among these three constructs, and use a
simultaneous equations approach to explore these relations. Economic
performance is measured as industry-adjusted annual return (market price per
share as sensitivity analysis). Environmental disclosure is based on information
reported in SEC Forms 10-K and focuses on pollution-related information in four
areas: 1) the total amount of toxic waste generated and transferred or recycled;
(2) financial penalties resulting from violations of 10 federal environmental laws;
(3) Potential Responsible Party (PRP) designation for the clean-up
responsibility of hazardous-waste sites; and (4) the occurrence of reported oil
and chemical spills. Environmental performance is measured as the ratio of
toxic waste recycled to total toxic waste generated. They find a positive and
significant relation between environmental performance and economic
performance (dependent variable), as well as a positive and significant link
between environmental performance and environmental disclosure (dependent
variable).
Lo and Shue (2007) investigate the relationship between corporate

sustainability and firm value using large US non-financial companies from 1999-
2002. Firm value is measured by using Tobins Q (dependent variable), and
sustainability is measured as a dummy variable (1 if a firm is listed in the DJSGI
USA in the current year or zero otherwise). Using both pooled and fixed effects
regression analyses; they find a positive and significant relation between
corporate sustainability and a firms market value. Furthermore, they also find a
71
strong interaction effect between corporate sustainability and sales growth on
firm value. Their findings indicate that companies with remarkable sustainable
development strategies are more likely to be rewarded by investors with a
higher valuation in the financial markets.
As reviewed earlier, both Callan and Thomas (2009) and Guenster et al. (2011)
find a positive and significant link between ESP and Q ratio (dependent
variable). Furthermore, using 3SLS regression analysis, Clarkson et al. (2011)
find that there is a two-way relationship between environmental performance
and economic performance (both positive). The link between environmental
disclosure and economic performance (dependent variable) is found to be
positive and significant. No endogeneity is found between environmental
disclosure and economic performance.
To sum up, prior studies show that firms with better environmental and social
performance have lower firm risk or cost of capital, but higher annual return or
Q ratio. For example, Al-Tuwaijri et al. (2004), Callan and Thomas (2009) and
Clarkson et al. (2011) find a positive relationship between a firms market
performance (annual return or Q ratio) and its corporate social performance.
However, Brammer et al. (2006) argue that expenditure on some corporate

social activities can be largely destructive of shareholder value. From an
aggregated level, they find a negative relation between CSR composite score
and market returns. From a disaggregated level, they find environmental and
community indicators are negatively associated with market returns, while
employment aspect is weakly positively related. Hence, they suggest that the
various aspects of corporate social behaviour should be examined separately in
order to achieve an accurate picture of their impacts on market returns.
Moreover, Nelling and Webb (2009) fail to find any significant link between a
firms corporate responsibility measures and their stock market performance.
Hence, the evidence on ESP and market performance of a firm remains
inconclusive at an empirical level.
Moreover, while the link between ESP and market performance is well
established, the link of ESD with market performance needs to be explored. In
Chapter 5, I will examine the relationship between a firms ESD and its market
performance.
72
3.2.1.2 Causality
There are a number of studies examining the link between CSR performance of
a firm and its financial performance. The rationale for this link is unclear at a
theoretical level, leading to inconsistent empirical results. On a conceptual level,
while some researchers theorize that being environmentally and socially
responsible, albeit in a strategic manner, could enhance a firms
competitiveness and lead to superior profits i.e., instrumental/strategic CSR
(Porter and van der Linde, 1995; Porter and Kramer, 2006); others drawing
upon the resource based view of the firm (Hart, 1995; Russo and Fouts, 1997),
argue that firms having unique scarce resources such as superior managerial
and financial resources i.e., higher profits could afford to be environmentally
and socially responsible. At this point, it is worth mentioning the slack resource
theory. Slack resource theorists argue that better financial performance
potentially results in the availability of slack (financial and other) resources
which could provide the opportunity for firms to invest in socially responsible
activities such as environment, community relations and employee relations. In
other words, if slack resources were available, better social performance would
result from the allocation of these resources into the social activities. McGuire et
al. (1988) provide some empirical evidence of slack resources theory, and find
that a firm's prior performance (both stock-market returns and accounting-based
measures) is more closely related to corporate social performance than is
subsequent performance. Furthermore, Hammond and Slocum Jr. (1996) state
that slack resources such as excess profits provide opportunities for a firm to
invest in more socially responsible behaviours that satisfy stakeholder
expectation. Those firms without slack resources are at an economic
disadvantage and have fewer resources available to invest in social
responsibility related activities. Thus better financial performance could be a
predictor of better environmental and social performance.
Depending upon the theoretical stance adopted, empirical work has tested both
of these theoretical propositions. However, it is not clear in the literature,
whether CSR performance leads to better financial performance or the other
way around (reviewed by Margolis and Walsh, 2001&2003). The potential
causality remains unclear (as mentioned by Siegel and Vitaliano, 2007 and
Siegel, 2009).
73
Makni et al. (2008) use simple Granger causal model to examine the causal
relationship between corporate social performance and financial performance.
Their empirical analyses are based on a sample of 179 publicly listed Canadian
firms covering 2004 and 2005. Social performance data is collected from
Canadian Social Investment Database, and financial performance is measured
by using ROA, ROE and market returns. They find no significant relationship
between the composite measure of CSP and corporate financial performance
(except for market returns). However, using individual measures of CSP, they
find a robust and significant negative impact of the environmental aspect of
CSP on all financial performance measures. They state that from a short-term
perspective, this is consistent with trade-off theory and negative synergy
hypothesis. The trade-off hypothesis supposes a negative impact of CSP on FP,
supports that socially responsible behaviour will net few economic benefits but
its numerous costs will reduce profits and shareholder wealth. The negative
synergy hypothesis supposes that higher levels of CSP lead to decreased FP,
which in turn limits the socially responsible investments.
Callan and Thomas (2009) assume the relation to run from corporate social
performance to financial performance. Drawing upon the collective consensus
of a number of previous studies, as reviewed by Margolis and Walsh (2001),
they argue for and find a positive relation between corporate social performance
and corporate financial performance. However, their sample being cross-
sectional does not allow for causality testing.
Nelling and Webb (2009) adopt Granger causality models to examine the
relation between CSR performance and financial performance using KLD data.
Their findings suggest that strong stock market performance leads to greater
firm investment in aspects of CSR programme related to employee relation, but
social responsibility activities do not affect financial performance.
Emerging evidence presented in recent studies (e.g., Clarkson et al., 2011 and
Arora and Dharwadkar, 2011) suggests that more profitable firms (i.e., those
having sufficient financial resources/slacks) are more likely to engage in CSR
activities. Clarkson et al. (2011) adopt the resource based view of the firm
theory and find that positive changes in firms financial resources in the prior
periods lead to significant improvements in firms relative environmental
74
performance in the subsequent periods. Furthermore, they find that significant
improvements in environmental performance in prior periods can lead to
improvements in financial performance (ROA) in the subsequent years after
controlling for the influence of Granger causality. The result of 3SLS test shows
that there is endogeneity between environmental performance and financial
performance (Q ratio).
To sum up, while some prior work (including Callan and Thomas, 2009)
assumes the causality to run from corporate social performance to corporate
financial performance, other studies find mixed results. Furthermore, while the
causality between ESP and CFP has been tested, the corresponding analysis
for ESD and CFP is lacking. In this regard, Brammer and Pavelin (2008)
suggest that future research should investigate the causality between ESD and
CFP. Accordingly, the causality between ESD and CFP will be studied in
Chapter 4.
3.2.2 Research on the link between ESP and ESD

Another stream of literature examines the relationship between ESP and ESD.
Environmental and social disclosures can be a means of communicating and
offering accountability to the various stakeholders about how a firm has
addressed its environmental and social responsibility. Debate on whether these
disclosures do indeed reflect a firms actual environmental and social
performance or whether they are just an attempt at green washing, has also
been on-going in the literature. While there is a body of theoretical and empirical
work on this topic which suggests that disclosures have been largely an attempt
at green washing, driven by a response to public and policy pressure and aimed
at legitimizing a firms operations (e.g., Patten, 1991, 2002a, 2002b; Cho and
Patten, 2007); others have also argued and shown a positive link between a
firms disclosures and its environmental performance (e.g., Al-Tuwaijri et al.,
2004; Clarkson et al., 2008, 2011). In the following two sections, I review the
empirical evidence on the link between ESD and ESP based on the two
competing theoretical arguments discussed in the preceding chapter.
Empirical research based on legitimacy theory
As reviewed in Chapter 2, Legitimacy theory implies a reactive or proactive

approach of companies to provide voluntary ESD. On the one hand, firms can
75
voluntarily disclose any positive environmental and social information to inform
stakeholders about their intentions to improve their environmental and social
performance. On the other hand, when firms environmental and social activities
threaten their legitimacy, they can provide extra environmental and social
information to influence stakeholders perceptions about their negative
performance without changing actual behaviour. Hence, firms can use
disclosure as a legitimizing tool, implying a negative relationship between ESD
and ESP.
Patten (2002a) examines the relationship between environmental disclosure

and environmental performance for a sample of 131 US companies.
Environmental disclosure (dependent variable) is based on firms annual reports
in 1990 (i.e., content analysis of 8 indicators and also report line counts).
Environmental performance is measured as the ratio of a firms specific amount
of toxics released to revenue (both data are for the year 1988). After controlling
for firm size and industry classification, Patten finds a negative and significant
link between environmental disclosure and environmental performance.
However, Patten also finds that the disclosure level of firms from non-
environmentally sensitive industries is more affected by toxic release levels than
is the disclosure of firms from environmentally sensitive industries.
Contrary to Pattens finding, Campbell (2003) selects 10 firms (out of the FTSE
100 companies) from 5 different industries between 1974 and 2000, and
examines the intra- and inter-sectional effects on environmental disclosure
drawing on legitimacy theory. The findings show that firms that are more
environmentally sensitive tend to disclose more environmental information in
their corporate reports than firms that are less environmentally sensitive.
Furthermore, the findings indicate that firms within sectors broadly agree on the
approximate level and direction (increase, decrease or no change) of
environmental disclosure, but agreement is rarely resolved at the year-to-year
level. Campbells study has provided limited evidence of legitimacy theory
related arguments to environmental disclosure. However, small sample size and
limited industry groups are key limitations of this study.
Cho and Patten (2007) criticised previous studies for not controlling for firm size
and industry classification. They use size-matched groups based on industry
76
membership (environmentally sensitive versus non-environmentally sensitive)
and environmental performance (worse performers versus better performers) to
test for differences in the use of monetary and non-monetary non-litigation
related environmental disclosure. Environmental performance is based on KLD
2002 environmental concern ratings (firms with no environmental concern are
labelled as better environmental performers). Similar to Patten (2002a),
environmental disclosure is based on 2001 10-K report for each firm (content
analysis of 8 indicators with two sub-components: monetary and non-monetary
indicators). Their findings reveal a significant and negative relationship between
voluntary environmental disclosure and environmental performance, which is
consistent with legitimacy-based theory (i.e., use disclosure as a legitimizing
tool).
Empirical research based on economics voluntary disclosure theory
Economics based voluntary disclosure theory indicates that firms should be

willing to provide voluntary ESD (particularly hard and objective information) for
investors to differentiate their firm types. In other words, good firms should be
willing to provide more ESD (that is costly), which is difficult for poor firms to
mimic.
As reviewed earlier, Al-Tuwaijri et al. (2004) examine the relations among

environmental disclosure, environmental performance and economic
performance. After controlling for endogeneity, they find a positive and
significant link between environmental performance and environmental
disclosure (dependent variable).
Clarkson et al. (2008) draw on both economics based voluntary disclosure

theory and socio-political theories and investigate the relation between firms
environmental performance and environmental disclosure to see which theory is
supported. Environmental disclosure data is collected from firms sustainability
reports or websites. A refined disclosure index is developed based on GRI
guidelines published in 2002. They focus on purely discretionary disclosure (i.e.,
data is collected from voluntary disclosure sources such as sustainability
reports or websites), which is helpful in analysing the propensity and quality of
voluntary disclosure. Environmental performance is measured by the total toxic
waste that is treated, recycled or processed as a percentage of the total toxic
77
waste generated by each firm (% recycled), as well as the ratio of TRI to firm
sales. Using a sample of 191 firms from the five most polluting industries in the
US, Clarkson et al. (2008) find a positive association between environmental
performance and the level of discretionary environmental disclosures. Overall,
their findings support economics based voluntary disclosure theory, but with
little support for socio-political theories. In other words, they find that firms with
better environmental performance tend to disclose more hard and objective
voluntary environmental information, which is difficult for poor environmental
performance firms to mimic (i.e., disclosures differentiate firm types).
In addition, by using 3SLS regression analysis, Clarkson et al. (2011) find a

two-way relation between environmental disclosure and environmental
performance. In other words, firms with more environmental disclosure tend to
be better environmental performers, and better environmental performers tend
to disclose more environmental information.
These latest findings are in line with recent suggestions in the literature that
societys views about corporate accountabilities have changed with concomitant
changes in corporate disclosure policies (Deegan, 2004). Recently, Jones and
Solomon (2010) find some empirical evidence from interviews with CSR
representatives from 20 UK listed companies on whether they consider social
and environmental reporting assurance (SERA) to be necessary, which is the
first research into the SERA that adopts an interview method. They find that half
of the respondents believe external SERA would enhance credibility and trust,
while the other half believed that external SERA was not necessary but internal
assurance was sufficient. They find the reason is that the respondents saw
SERA as predominantly a managerial tool for checking the efficiency of internal
management control systems, rather than as a mechanism for enhancing
corporate accountability to stakeholders and building credibility and trust.
However, they suggest that perhaps SERA should act as a means of furthering
the dialogic relationship between companies and their stakeholders.
Furthermore, if the SERA function involves stakeholders in verifying companies
environmental and social responsibility, then a closer and more accountable
relationship will be nurtured through SERA.
78
To sum up, mixed results have been found in previous literature examining the
link between voluntary environmental disclosure and environmental
performance (e.g., Patten, 2002a; Al-Tuwaijri et al., 2004; Cho and Patten, 2007;
Clarkson et al., 2008). Chapter 5 will further test this link, namely the
relationship between environmental disclosure and a firms carbon eco-
efficiency, the latter used as a measure of environmental performance. In
addition, a test between social disclosure and social performance as measured
by employee productivity will also be carried out.
As indicated by prior studies, the availability of environmental or social

disclosure data is a key constraint in disclosure literature, which has resulted in
a smaller sample size or sample selection bias in prior studies. For example,
when disclosure data is collected by hand, only large firms are included such as
FTSE 100 (Henriques, 2010), or heavy polluting industries are selected such as
oil & gas, utilities and chemicals industries (Clarkson et al., 2008), or even
smaller sample of firms are included such as two firms from five industrial
sectors (Campbell, 2003). Furthermore, Brammer and Pavelin (2008) also
suggest that Our study, in common with much of the empirical work in the area
conducted in the UK, would benefit from improved availability of data,
particularly regarding corporate environmental performance (p.134). Brammer
and Pavelin (2008) choose the ratio of aggregated level of fines incurred for
environmental transgressions over 4 years period to firms total assets as
environmental performance measurement. However, Clarkson et al. (2008)
argue that the proxies for environmental performance are more appropriate, as
they are the actual pollution discharge data published by local Environmental
Protection Agency. In chapter 5, I adopt similar environmental performance
measurement as Clarkson et al.s (2008) (i.e., the ratio of carbon emission to
total sales). Social performance is captured by employee productivity (based on
the theoretical arguments of Siegel, 2009). From an economic/strategic
perspective on green management practices, Siegel (2009) argues that firms
can use environmental and social related tactics to achieve their strategic goals
such as increase of employee productivity and share price. One such tactic
could be the use of social disclosures to improve employee morale and
productivity. Hence, I test the link between social disclosures and employee
productivity.
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3.2.3 Research on the link between ESD and CFP
From an economics perspective, producing high quality objective disclosures
entail costs (Brammer and Pavelin, 2008; Buhr, 2002; Li and McConomy, 1999).
However, in line with the predictions of the voluntary disclosure theory
(Verrecchia, 1983), recent research shows that they also entail benefits
particularly in the form of reducing the information asymmetry between the firm
and its investors (Cormier et al., 2011). To date however, research has failed to
establish a clear link between a firms environmental and social disclosures and
various measures of its financial performance. In Chapter 4 and 5, I will re-
investigate this link.
The measurement of corporate environmental and social disclosures is

important when examining the relation between ESD and CFP. Since
environmental and social disclosures are voluntary, there is no unifying format
of reporting. Index approach is a common method used to codify ESD,
especially for environmental disclosure measurement (e.g., Wiseman, 1982;
Patten, 2002a; Clarkson et al., 2008; Cormier et al., 2011). There are
arguments about the choices of disclosure indicators and scoring bias. However,
focusing on the quality of firms voluntary disclosures, this seems to be an
appropriate method. For example, Clarkson et al. (2008) use GRI guidelines
and develop a comprehensive environmental disclosure index which enables
them to examine disclosure quality (i.e., disclosure of individual indicator). Gray
et al. (1995) use an index approach and construct a research database
including social and environmental information provided by UK firms covering
21 years (1979-1999). Due to time and labour constraints, their data is only
available up to year 1999. As mentioned in the previous chapter, in this study, a
more recent database namely Bloomberg disclosure scores is used for
measuring corporate environmental and social disclosures. In the following
section, prior studies regarding the ESD-CFP link (both with operating
profitability and market measures of performance) are reviewed in chronological
order.
ESD and operating profitability
Exploring the determinants of a firms environmental disclosures, a number of

80
its profitability (e.g., Freedman and Jaggi, 1988; Patten, 1991; Brammer and
Pavelin, 2008) with overall inconclusive results.
Freedman and Jaggi (1988) examine the relationship between pollution

disclosure and economic performance for four highly polluting industries.
Economic performance is measured by using six profitability measures
including ROA, ROE and other operating performances. A pollution disclosure
index is developed to measure the extensiveness of disclosures. No significant
relation is found regarding this link for full sample of companies. However, when
the sample is segmented by industry group, they find a significant and positive
correlation between pollution disclosure and operating performance for oil
industry. Furthermore, they also find that large firms with poor operating
performance provide more pollution information. For smaller firms, no
association between the two variables is found.
Patten (1991) investigates whether the voluntary social disclosures included by

companies in their annual reports are related to either public pressure or firm
profitability. The sample consists of 128 Fortune 500 listed companies from
eight industries in 1985. Social disclosure (dependent variable) is based on
firms annual reports in 1985. Public pressure is captured by firm size and
industry classification. Profitability is measured by using ROA, ROE, five year
average ROE, one year lagged ROA, and a dummy variable indicating firms
reporting a decrease in net income from the previous period. Patten finds that
firm size and industry classification (public pressure variables) are significant
explanatory variables of voluntary social disclosures. However, profitability
variables are not significantly linked with social disclosures.
Recently, Brammer and Pavelin (2008) investigate the influences of different

factors on the quality of firms environmental disclosure for a sample of 447 UK
companies, including the relationship between environmental performance and
environmental disclosure. Disclosure data is collected from the PIRC
Environmental Reporting 2000 survey. Environmental performance is measured
as the ratio of aggregated level of fines incurred for environmental
transgressions over 4 years period to firms total assets. They find a firms
record of environmental fines has no significant effect on its propensity to
disclose an environmental policy, but it does exert a significant positive effect on
81
the likelihood that a firm will disclose improvements, targets and environmental
audit information. In other words, poor performers tend to disclose more
environmental information related to their environmental improvements, targets
and audit. They also find firm size is positively and significantly linked with all
components of environmental disclosure, and media exposure is positively and
significantly associated with some aspects of environmental disclosure. No
significant relation is found with respect to other factors such as leverage or
firms profitability. While Brammer and Pavelin (2008) include various control
variables and lagged variables to avoid endogeneity problem, they recommend
that future studies should use longitudinal data and examine the causality
between these variables particularly profitability and disclosures. In Chapter 4, I
will first examine the association between ESD and operating profitability and
then examine potential causality between ESD and operating profitability.
ESD and market based financial performance
From a capital markets perspective, public disclosures of how a firm addresses

its environmental and social challenges can have significant financial
implications. To the extent that these disclosures reveal a firms current
environmental and social performance as well as its future potential, investors
can gauge how well the firm is currently managing its environmental and social
risks, and how well it is equipped to tackle these in the future. Hence, investors
can value the firm accordingly. Scholars have examined the link between ESD
and measures of market performance using different methodologies.
One group of studies uses event study methodology to assess financial impact,
when firms engage in either socially responsible or irresponsible acts and
provide relevant information. For example, Shane and Spicer (1983) study the
stock market reaction to the negative environmental publicity received by firms
which feature in the Council of Economic Priorities (CEP) reports in the US.
Consistent with their expectations, they find a negative abnormal return for
these firms on day t-1 and t-2 of the event date t. Moreover, Lorraine et al.
(2004) examine whether publicity (either good or bad) about environmental
performance (i.e., fines for environmental pollution and commendations about
good environmental achievements) affects companies share prices for a
sample of 32 events in the UK. They find that while the market ignores good
82
news, it does react to news about fines particularly to relatively high fines, for up
to one week post release of the news. In addition, Freedman and Patten (2004)
examine the reaction of the market to revisions in the Clean Air Act in 1989 in
US, and find that companies which disclosed higher levels of size-adjusted toxic
releases into the air suffered more negative market reactions than companies
with better performance. However, they also find that this effect is mitigated for
firms which made larger financial report environmental disclosures (i.e., this
negative impact is reduced for firms which make higher and detailed
environmental disclosures in their annual reports).
Murray et al. (2006) carry out a longitudinal study using an environment and
social disclosure database (covering 1988-1997) provided by CSEAR to
investigate the relationship(s) between environmental and social disclosures
and UK largest firms financial performance. They find no direct relationship
between share returns and environmental and social disclosures. However,
they reveal a convincing relationship between consistently high returns and the
predilection to high disclosure. There is some empirical evidence showing that
firms with higher environmental (social) disclosures tend to have lower analysts
forecast dispersion. Aerts et al. (2008) investigate the information dynamics
between corporate environmental disclosure (both print-based and web-based
information), financial markets (as proxied by financial analysts' earnings
forecasts) and public pressures (as proxied by a firm's media exposure). The
sample consists of companies from continental Europe and North America.
Using 3SLS regression analysis (i.e., controlling for endogeneity), they find that
enhanced environmental disclosure can lead to more precise earnings forecasts
by analysts, suggesting that such disclosures reduce the information asymmetry
between the firm and the stock market participants. Such effect is reduced for
companies with extensive analyst following and in environmentally sensitive
industries. Moreover, these relationships are shown to be starker in Europe
than in North America. They find most observed relationships hold for either
print- or web-based disclosure, except for North America in which web-based
disclosure seems to have no influence on analysts' forecasting work.
Ducassy and Jeannicot (2008) examine how CSR information affects investors
behaviour using an event study approach. They find a significant market
response to the publication of social reporting rankings generated by the CFIE
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(Centre Franais d'Information des Entreprises). The most significant impact is
observed not for high-ranking firms, but for those having risen or regressed the
most in rank since the prior year. Their findings indicate the importance that
investors attribute to firms CSR dynamics. Furthermore, Becchetti et al. (2009)
use a sample of 278 US firms from the Domini 400 Social Index between 1990
and 2004. The results show that the impact of social responsibility-related
information (e.g., additions and deletions from the Domini Index) has risen over
time. The abnormal returns around the event data are significantly negative in
case of exit from the Domini Index. The result is robust to the adoption of
different (non)parametric methods after considering stock market seasonality,
changes in the estimation window or the event window, changes in the model
used for estimating abnormal returns (i.e., market model and CAPM multi-factor
model), and after controlling for financial distress shocks.
Clarkson et al. (2010) examine the impact of voluntary environmental disclosure

on cost of equity and firm value, controlling for firms environmental
performance. Using a sample of firms from five most polluting industries in the
US, they find voluntary environmental disclosure is incrementally informative for
investors and show a negative association between TRI emission 6 and firms
valuation. However, the relation between firms cost of equity capital and
voluntary environmental disclosure is not significant. They run robustness tests
and suggest that voluntary environmental disclosure plays an important role in
predicting expected future cash flows (profitability) but not for assessing the
riskiness of these cash flows i.e., the cost of equity capital. Furthermore,
Clarkson et al. (2011) use 3SLS regression analysis and find a positive and
significant association between environmental disclosure (dependent variable)
and economic performance (equivalent to Q ratio). However, they do not give a
clear theoretical rationale for why environmental disclosures should be affected
by the market value of the firm rather than the other way round.
Dhaliwal et al. (2011) investigate the relationship between corporate social

reporting and cost of equity capital. They find that firms with higher cost of
equity capital in prior year tend to initiate disclosure of social responsibility
activities in the current year, and the initiating firms with superior social
responsibility performance have lower cost of equity capital in the subsequent
6
Toxic emissions data, the higher TRI indicates worse environmental performance.
84
year. They also find some evidence that firms initiating social responsibility
disclosure with superior social performance attract dedicated institutional
investors and analyst coverage.
Studies discussed above suggest that environmental disclosures do have

capital market implications, however not only are the results of various studies
mixed but are biased towards a negative reaction to adverse environmental
disclosures. These results are quite contrary to the expectations that higher and
more objective factual disclosures should help reduce the information
asymmetry between a firm and its investors. The first study to offer some
evidence consistent with this argument is by Cormier et al. (2011). Specifically,
Cormier et al. (2011) investigate whether social disclosure and environmental
disclosure reduce information asymmetry between managers and stock market
participants, and if so, are they complement or substitutes in reducing this
asymmetry. The measurement of social and environmental disclosure is based
upon a coding instrument that makes some explicit assumptions about the
value and relevance of information (39 indicators divided into six categories).
Information asymmetry is captured by share price volatility and bid-ask spread.
Their findings suggest that social disclosure and environmental disclosure
reduce the information asymmetry and act as substitutes. They suggest that
future research should distinguish between social and environmental
disclosures. In this thesis, I extend Cormier et al.s (2011) work by analysing the
impact of environmental and social disclosures on firm market value, arguing
that if such disclosures do reduce information asymmetry then they should have
a positive link with firm market value. Moreover, in line with Cormier et al.s
(2011) suggestions, I analyse the impact of environmental and social
disclosures separately on firm value.
In the following section, relevant studies investigating the relationship between

environmental and social responsibility and corporate governance will be
reviewed. This review sets the context for the analysis of Chapter 6, which
examines the link between board attributes, board CSR strategy and corporate
environmental and social performance.
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3.3 Environmental and social responsibility and corporate
governance
Orlitzky et al. (2011) provide a review of recent theoretical and empirical
evidence on strategic implications of CSR, including the link between leadership
and CSR, and the association between CSR and economic/financial
performance. They suggest that strategic leadership should be incorporated into
CSR research. They review three theoretical approaches to strategic corporate
social responsibility, namely cost-benefit analysis, transaction cost economics
and recourse-based view of the firm, and posit that voluntary CSR actions can
enhance a firms competitiveness and reputation. Hence, the end result of CSR
activities should be an improvement in financial and economic performance.
Based on an overview of recent empirical evidence, they conclude that
economic theories of strategic CSR have the greatest potential for advancing
CSR studies. In the following paragraphs, first, the link between corporate
governance (CG) and CSR is introduced. In this context, strategic CSR is
further explored; particularly the roles of boards of directors in leading firms
CSR strategy and performance are reviewed. Finally, the association between
firms CSR strategy and their environmental and social performance is
discussed.
Link between CG and CSR
With the widening remit of corporate governance to include corporate

responsibilities towards not only the shareholders but also other stakeholders of
the firm (Aguilera et al., 2007; [UK] Companies Act, 2006; Jensen, 2010; UK
Corporate Governance Code, 2010), a few studies in recent years have
examined the link between various governance mechanisms and corporate
social responsibility.
A notable study by Jamali et al. (2008) examines the link between corporate
governance (CG) and corporate social responsibility, using in-depth interviews
with top managers from eight companies in Lebanon. They develop three sets
of interview questions based on prior literature review: 1) about corporate
governance, 2) about corporate social responsibility, and 3) about the
conception of CG-CSR relationship. From broader conception of corporate
governance, Jamali et al. (2008) find that there is a clear overlap between CG
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and stakeholder conception of CSR. Both CG and CSR call on companies to
assume their fiduciary and moral responsibilities towards stakeholders. They
also find that there is a two-way relationship (i.e., CG and CSR should not be
considered and sustained independently). CG is not entirely effective without a
sustainable CSR drive, because a company has to meet various stakeholders
needs in order to create value for its shareholders. Furthermore, they find that
good CG is increasingly considered as a necessary and foundational pillar for a
genuine and sustainable CSR orientation.
Recently, Jo and Harjoto (2012) investigate the causal effect of corporate

governance on corporate social responsibility, using a large sample of US
companies during the period from 1993 to 2004. They propose two hypotheses,
namely the overinvestment hypothesis based on agency theory and the conflict
resolution hypothesis based on stakeholder theory. Jo and Harjoto (2012) use
KLD data to measure CSR and IRRC governance data to measure CG
including insider blockholder ownership, board independence, outside
institutional ownership, and the number of analyst following a firm. Using both
Heckman (1979) two-stage estimation procedure and instrumental regression
methods, they find that while the lag of CSR does not affect CG variables, the
lag of CG variables positively affects firms CSR engagement, after controlling
for various firm characteristics. This finding suggests that direction of causality
is likely to run from CG to CSR rather than the other way round. Furthermore,
after correcting for endogeneity bias, they find that CSR engagement is
positively linked with CFP, which supports the conflict resolution hypothesis
based on stakeholder theory rather than the CSR overinvestment hypothesis.
Overall, their findings suggest that good governance leads to positive CSR
which is also beneficial for a firms long run economic sustainability. In the
following section, I review in greater detail the literature on the role of one
specific governance mechanism, that is the board and its link with corporate
social performance.
3.3.1 Board attributes and firms environmental and social performance

Studies examining the link between various board attributes and corporate
social performance have generally drawn upon management and corporate
governance literature, particularly from the stakeholder and legitimacy
perspective (Webb, 2004; Aguilera et al., 2006) and the resource dependency
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perspective (Pfeffer and Salancik, 1978; Hillman et al., 2000) respectively. From
legitimacy perspective, the reputation of companys directors in the community
and among stakeholders enables the company to carry on its business and
actions, mobilise external support and resources, and enhance organisational
legitimacy (Provan, 1980; Deephouse, 2000).
Based on resource dependence theory, boards can be a solution to external

CSR challenges. Hence, by establishing external ties with stakeholders and the
wider society, directors are able to attract and retain precious resources to
enhance the organisational legitimacy (Zahra and Pearce, 1989). According to
Hillman et al. (2000), most research on corporate directors has focused on two
roles: agency and resource dependence. From the agency theory perspective,
the board of directors, particularly the outside directors on the board, can be
seen as the monitors with the role to oversee that the company is run effectively
to achieve long term financial success. From the resource dependency
perspective, the board of directors can be seen to itself provide, as well as help
a firm secure access to critical resources that enable it to meet external
challenges including the environmental and social challenges. Using a sample
of US airline firms, Hillman et al. (2000) examine the resource dependence role
of directors. That is, examine how board composition changes with the
changing resource dependence needs of the firm. They find that boards
function as a link to external environment is an important one, and firms
respond to significant changes in their external environment by changing board
composition.
Johnson and Greening (1999) investigate the effects of corporate governance

captured by the number of outside directors on a companys board and the
institutional ownership types on two dimensions of corporate social performance;
namely, people dimension (women and minorities, community and employee
relations) and product quality dimension (product and environment). Johnson
and Greening argue that because outside directors are hired to act as control
experts and to help manage external constituencies, they are likely to act in the
best long-term interests of shareholders by encouraging the development of
quality products and by helping a company to maintain a positive environmental
reputation. Indeed, they find evidence that outside director representation is
positively linked with both people and product dimensions of CSR. Furthermore,
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they also find various types of institutional ownership have different effects on
corporate social performance. For example, top management equity is only
positively linked with the product quality dimension of CSP. They suggest future
research should use disaggregated measure of CSP, as the influences of
governance mechanisms on each CSP dimension may be different. Thus
environmental and social responsibility is divided into two separate dimensions
of CSR in this thesis.
Webb (2004) investigates the structure of the board of directors at socially

responsible firms. Using two-sample paired t-test and regression analyses, she
finds a few (out of 16) board structure characteristics are significant at socially
responsible firms compared to a matched sample. Particularly, the percentage
of outside directors, women on the board and board size are significantly
different between social responsible and non-responsible firms. Webb (2004)
also finds that socially responsible boards are more likely to have a CEO who is
not also the chairman of the board.
Mallin and Michelon (2011) investigate the relationship between board attributes
and corporate social performance using a sample of 100 US companies listed in
the Business Ethics 100 Best Corporate Citizens from 2005-2007. Drawing
upon the legitimacy and resource dependence theories, they argue that boards
as providers of both human and relational capital enhance a firms reputation,
by having relationships with external environment and by providing insightful
advice to top management about stakeholders expectations. Using KLD data
(to measure corporate social performance) and several governance-related
variables, including board independence, board diversity (as measured by
percentage of women on board), duality, presence of CSR committee, and
number of directorships of non-executive directors (as measure of their
community influence), they find a positive link between a number of board
variables including board independence, board diversity and corporate social
performance. Furthermore, they also find negative effects of CEO duality and
the number of directorship of community influentials on CSP.
More recently, Post et al. (2011) investigate the link between boards of directors
composition and environmental corporate social responsibility. Using disclosed
company data and the natural environmental ratings data from KLD for 78
89
Fortune 1000 companies, they find that firms with higher proportion of outside
board directors and with boards composed of three or more female directors
tend to have higher KLD strengths scores. That is, firms with more independent
and diverse board members tend to have better environmental performance.
While prior studies on board attributes and measures of corporate social

performance have found rather consistent results with respect to some board
attributes particularly the presence of independent directors and women on the
board, these studies are constrained by sample size (e.g., Webb, 2004) as well
as selection (e.g., Mallin and Michelon, 2011). Also most prior studies ignore
the issue of endogeneity between the board attributes-firm performance link
(Adams et al., 2010) which is likely to constrain the interpretation of such
studies. In chapter 6, using a much larger and diverse sample of firms, the link
between a wide array of board attributes and firms environmental and social
performance is tested while controlling for the potential endogeneity of this link.
3.3.2 Board role in leading CSR strategy

The way boards are structured is vital to addressing strategic issues,
developing policies and ultimately governing firms (Galbreath, 2010).
Developing and implementing the appropriate vision and strategy of firms,
including their environmental and social strategy, is the function of corporate
board (Ho, 2005; Mackenzie, 2007). As also stated by the Combined Code
(2003) on Corporate Governance (s 172), directors should consider both
shareholders and other stakeholders to meet their expectations. Goodstein and
Boeker (1991) propose that boards of directors may directly and indirectly affect
strategic decisions on a firms products and services. One common
denominator is an emerging view that a board's failure to address important
CSR concerns may increase a firm's financial and reputational risk. Recognizing
the role of the board in setting the strategic vision and direction of the company,
including in terms of addressing wider stakeholder expectations, a few studies
recently have started exploring both on a theoretical as well as empirical level,
the remit of corporate governance in terms of corporate social responsibility.
Ho (2005) examines the link between corporate governance and corporate

competitiveness. Using a holistic approach, Ho finds the more a firm conforms
to good corporate governance, the stronger is the firms competitiveness.
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Corporate competitiveness is captured by 18 financial indicators such as sales
per employee, ROA and market capitalization etc. Corporate governance is
captured by using a questionnaire of 116 indicators on a 7-point Likert scale
(that is board structure, stewardship, strategic leadership, capital concentration,
managing capital market pressure, discharging social responsibilities, and all
factors). Data is collected from top executives of international companies (about
their conformance to good corporate governance practices and their
perceptions of the competitive conditions of the companies). Ho argues
corporate governance attributes are inter-related. Based on the results of
correlation analysis, Ho presents the inter-relationships among governance
variables related to board structure, strategic leadership and corporate social
responsibility: 1) there is a positive and significant relation between board
structure and strategic leadership; 2) a positive and significant link between
board structure and discharging social responsibilities; and 3) a positive and
significant association between strategic leadership and discharge social
responsibilities. It is worth noting that Ho assumes that social responsibility is
part of corporate governance.
Mackenzie (2007) draws on the economic literature i.e. market failure (e.g.,
information asymmetry, absence of competition and costs of a transaction are
external to the company) and internal incentives structure (e.g., boards failure
to address/change his performance objectives) to analyse the primary causes of
CSR breaches. Mackenzie posits company boards are key participants in
ensuring firms meet CSR standards. By collecting survey data of board practice
(including roundtable discussions by board directors, interviews with board
directors, company secretaries and CSR managers, and observations of actual
board meetings) from 20 large UK FTSE 100 listed companies, Mackenzie finds
that company boards could ensure compliance with CSR standards by
addressing incentive problems from market failure and their own
incentives/performance management systems, especially the roles that CSR
committees play in the process. Mackenzie suggests that boards should re-
orientate their activities in terms of establishing board policies supporting
government action on relevant CSR issues and overseeing implementation of
these policies. For example, Mackenzie (2007) finds some boards have started
to balance financial incentives with incentives to support responsible behaviour,
91
e.g., introducing occupational health and safety targets into executive incentives
or adopting a more systematic balanced scorecard approach to executive
remuneration, which indicate a significant shift in focus away from short-term
financial goals to long-term value creation. After all, the central point of the
economics arguments about market failure is that exploiting market failure is a
strategic opportunity for business. So a board discussion motivated solely by
strategic considerations may very well lead a company to exploit market failures
and resist regulatory interventions, rather than to exercise self-restraint
(Mackenzie, 2007, p.941). Hence, Mackenzies (2007) findings suggest that
firms boards play an important role in directing their CSR vision and strategy.
Galbreath (2010) uses a cross-country Ceres (Coalition for Environmentally

Responsible Economies) data on 100 firms (76 US and 24 non-US), and
examines the relation between board structure variables and a companys
proactive strategic posture in terms of corporate governance practices towards
addressing the challenge of climate change. Board variables in his analysis
include board size, CEO duality, director age, gender proportion, and outsider
representation. Governance practices addressing climate change cover five
aspects: 1) board oversight (i.e., whether a board committee has explicit
oversight responsibility for environmental affairs); 2) management execution
(i.e., whether executive officers compensation is linked to attainment of
environmental goals and Green House Gas (GHG) targets); 3) public disclosure
(i.e., whether securities filings identify material risks and opportunities posed by
climate change, and whether sustainability report offers comprehensive,
transparent presentation of company response measures); 4) emission
accounting (i.e., whether company has third party verification process for GHG
emission data); and 5) strategic planning (i.e., whether company pursues
business strategies to reduce GHG emissions, minimize exposure to regulatory
and physical risks, and maximize opportunities from changing market forces
and emerging controls). Galbreath finds evidence that some board variables
including board size and independent board chair are associated with firms
having better governance practices related to climate change. Given the limited
sample size and the exploratory nature of his study, he suggests future
research should explore further the relationships between corporate
governance practices, climate change, institutional environments and board
92
structure, particularly in industries other than energy, manufacturing and
transport.
Focussing on the boards strategic role in addressing the challenges of climate

change in the electric utilities industry in US, Ortiz-de-Mandojana et al. (2012)
examine how director interlocks affect a firms ability to adopt a proactive
environmental strategy, using a sample of 90 US electric utilities companies in
2005. Proactive environmental strategy is defined as the decision to make
voluntary investments in renewable systems of energy generation. Director
interlocks variable is captured by the number of interlocking ties with other
companies. Consistent with the resource dependency argument, Ortiz-de-
Mandojana et al. (2012) find that director interlocks with firms providing green
equipment and business knowledge-intensive services are positively linked with
the possibility to adopt a proactive environmental strategy; while director
interlocks with suppliers of financial resources and fossil fuels tend to
discourage adoption of a proactive environmental strategy. Furthermore, Ortiz-
de-Mandojana et al. call for a more in-depth analysis of the influences of board
characteristics (e.g., board size, professional and educational backgrounds of
individual directors) on a firms sustainable strategy.
To sum up, research suggests that boards of directors can play an important
role in leading CSR strategy. The ability of a companys boards to foresee the
impact of climate change/social responsibility on its business reflects its ability
to understand its business activities in the light of longer-term and systematic
risks. Firms that are able to make short-term decisions in the light of such a
longer-term view are much more likely to be cognisant of the systematic risks
that they face, and can be better prepared to face the challenges and
unforeseen circumstances such as the financial crisis (Greenwald, 2009). There
are some limitations of these prior studies. First, CSR strategy is not directly
measured (Ho, 2005; Mackenzie, 2007). Even if it is measured, only one
variable is used (e.g., Ortiz-de-Mandojana et al., 2012). Furthermore, prior
research is constrained by cross-sectional study (Galbreath, 2010). In chapter 6,
CSR strategy is directly measured by using a composite score of a number of
relevant CSR variables. Furthermore, I conduct a longitudinal study to examine
the influences of various board attributes on a firms multi-pronged CSR
93
strategies. Moreover, the sample covers a wide array of industries across
several years making the analysis more representative of industries.
3.3.3 CSR strategy and firms environmental and social performance

In an attempt to explain the positive association between measures of a firms
environmental performance and financial performance, some studies drawing
upon the notion of CSR as a competitive strategy (cf: Porter and Kramer, 2006;
Porter and Van der Linde, 1995) and adopting the resource based view of the
firm (Hart, 1995; Rousso and Fouts, 1997) have posited that it is the superior
environmental strategy and the unobserved managerial capability, unique
resources and competitive advantage that a firm possesses which can enable it
to achieve superior environmental and financial performance.
Hart (1995) theorized that proactive investments in environmental strategies

including pollution prevention and product stewardship could confer both
environmental and economic benefits to firms, and emphasized the importance
of communicating these environmental strategies to external stakeholders. Hart
also states that for firms to sustain their competitive advantages in the field of
environment, it is important to consistently build upon their internal human and
organisational capabilities and resources, as these may otherwise erode over
time as competitors catch up.
Russo and Fouts (1997) empirically tested the predictions of RBV, and found a
positive link between environmental performance and firm operating profitability.
They assumed this link to be mediated by the unobserved superior
environmental strategy which they conjectured to be based on unique
combinations of intangible (such as human, reputation, technology), and
tangible (such as financial reserves and physical equipment) assets. Russo and
Fouts also stress the importance of nurturing and building resources through
sustained actions for creating and maintaining a pro-environmental internal
capabilities and external reputation.
Al-Tuwaijri et al. (2004) argue that the reason for the positive link between a
firms environmental and financial market performance is the unobservable
managerial quality. In other words, they imply that better managers are able to
design superior environmental strategies, which in turn lead to superior
environmental performance and disclosures. Clarkson et al. (2011) also argue
94
that it is the superior managerial capability that can allow a firm to develop a
proactive environmental strategy. They measure a firms proactive
environmental strategy and its superior managerial capability by the firms
investments in R&D, its sales growth and its enterprise value to assets (EV). So
measured, they find a positive link between a firms proactive managerial
environmental strategy and its environmental and economic performance.
While both Al-Tuwaijri et al. (2004) and Clarkson et al. (2011) posit the
environmental strategy to be responsible for superior environmental
performance, neither study explicitly incorporates relevant CSR related board
attributes. Furthermore, one important limitation of these studies is that they
either assume the (unobserved) superior CSR strategy to drive CSR
performance (as in the case of Al-Tuwaijri et al., 2004) or use indirect measures
to capture a firms strategic stance towards its CSR obligations. Given that
developing the appropriate corporate strategy including CSR strategy is a
function of the board (UK Code of Corporate Governance, 2010), both board
attributes and CSR strategy may affect a firms environmental and social
performance.
3.3.4 Within-equilibrium or out-of-equilibrium phenomenon

Figure 3.1 provides a brief summary of existing literature and the omissions in
this literature about the link among board attributes, CSR strategy and
corporate social performance.
95
Figure 3.1: Existing Literature (Two Main Streams)
Board Attributes Corporate Social

(Exogenous) Performance
Stream 1: Resource Dependency Theory (RDT)
CSR Strategy
(Omitted variable)
Management Corporate Social

Capability Performance
Stream 2: Resource based view of the firm (RBV)
It can be seen from Figure 3.1 that one stream drawing upon the corporate
governance literature, particularly the resource dependency theory (RDT), has
focused on studying the relation between board structure and composition, and
corporate social performance (section 3.3.1). Of interest in this literature has
been the link between various board attributes particularly director attributes
and corporate social performance (e.g., Johnson and Greening, 1999;
Galbreath, 2010 and Mallin and Michelon, 2011; Webb, 2004). However, as
mentioned earlier the underlying assumption in these studies is that board
attributes are exogenous. Also while some studies in this literature (covered in
section 3.3.2) consider the role of the board in CSR strategy setting, the latter
variable is not well defined (e.g., Mackenzie, 2007) nor is the link between
board attributes and CSR strategy directly analysed.
Another stream drawing upon the competitive strategy literature and adopting
the resource-based view (RBV) of the firm (Hart, 1995; Rousso and Fouts,
1997), suggests that firms possessing unique (CSR conducive) resources, both
human and financial capital are able to develop superior CSR strategies that
translate into superior, CSR-related performance. However, CSR strategy is
considered as an omitted/unobserved variable in this literature (e.g., Al-Tuwaijri
et al., 2004; Clarkson et al., 2011). Also while this literature acknowledges the
role of management capability in determining firm CSR strategy (e.g., Al-
96
Tuwaijri et al., 2004 and Clarkson et al., 2011), it ignores the fact that
developing and implementing the appropriate CSR vision and strategy of firms
is the function of corporate board (Ho, 2005; Mackenzie, 2007).
It is widely acknowledged within the corporate governance literature (e.g.,

Adams et al., 2010; Agrawal and Knoeber, 1996; Hermalin and Weisbach, 1998,
2003) that board of director characteristics and firm performance are
endogenous outcomes. According to Hermalin and Weisbach (2003), the board
of directors of a company is an endogenously determined institution, which
implies that the choice of directors on a board would be a within-equilibrium
phenomenon determined by the companys own characteristics including its
(CSR related) strategies and financial/non-financial performance (such as CSR
performance). Figure 3.2 shows Hermalin and Weisbach (2003) theoretical
model establishing the link between board of directors and firm performance.
Figure 3.2 Hermalin and Weisbach (2003) theoretical model with respect to
boards of directors: The joint-endogeneity problem plaguing work on boards of
directors
Board
actions
Board Firm
characteristic performance
Source: Hermalin and Weisbach (2003)
As a within-equilibrium phenomenon, CSR performance may also affect board

choices. Furthermore, Hillman et al. (2007) find that the presence of women on
boards is consistent with resource dependence theory. They posit that large
firms face legitimacy pressures, firms operating in industries that are heavily
dependent on female employees, and firms with ties to companies with female
board members are likely to have women directors on their board. Hence, they
argue the composition of boards could mirror the environmental constraints
faced by firms, and propose that firms can strategically select board members
as a means to reduce uncertainty. Therefore, it can be argued that CSR
performance may affect board attributes. Prior studies examining the link
97
between board characteristics and CSR performance treating board attributes
as exogenous may lead to misleading interpretation of findings. In Chapter 6, I
adapt Hermalin and Weisbach (2003) theoretical model in the context of CSR
study and test the links between board attributes, board CSR strategies and a
firms environmental and social performance using structural equation modelling,
which allows to control for the possible endogeneity of these links.
3.4 Conclusions
In this chapter, prior literature about environmental and social responsibility is
reviewed. First, research about the link between environmental and social
responsibility and firms financial performance is discussed. Although prior
studies provide mixed results regarding this link, it is important to distinguish
ESP and ESD. In Chapter 4 and 5, I will investigate the link between ESD and
firms financial performance (both operating profitability and market
performance). Furthermore, In Chapter 5, I will test the association between
ESD and ESP.
I also review in this chapter existing literature about the relation between
environmental and social responsibility (including related strategy and
performance) and corporate governance. In Chapter 6, I will examine the
relationship between corporate governance (in particular board attributes and
related CSR strategy) and ESP. In the next i.e., the first empirical chapter, the
link between environmental and social disclosures and firm profitability will be
examined.
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Chapter 4: Environmental and social disclosures and firm
profitability
4.1 Introduction
Environmental and social disclosures are a means through which a firm informs
its stakeholders, particularly its investors, as to how it has addressed its
environmental and social responsibility. Given the voluntary nature of these
disclosures, research scholars approaching from the accounting and economics
perspective have taken a keen interest in exploring the determinants and the
consequences of such disclosures. From an economics perspective, producing
high quality objective disclosures entail costs (Brammer and Pavelin, 2008;
Buhr, 2002; Li and McConomy, 1999). However, in line with the predictions of
the voluntary disclosure theory (Verrecchia, 1983), recent research shows that
they also entail benefits particularly in the form of reducing the information
asymmetry between the firm and its investors (Cormier et al., 2011). To date
however, research has failed to establish a clear link between a firms
environmental and social disclosures and its profitability and market value (will
be examined in the next chapter) a gap that this study attempts to fill.
Exploring the determinants of a firms environmental disclosures, a number of

its financial performance including profitability (Brammer and Pavelin, 2006,
2008; Clarkson et al., 2008; Cormier et al., 2011; Freedman and Jaggi, 1988;
Patten, 1991). However, all find no link between environmental disclosures and
various measures of a firms profitability. Discussing the limitations of their own
work, and that of others, Brammer and Pavelin (2008) suggest that future work
should use longitudinal data and try to resolve causality concerns. However,
given the cross sectional nature of most prior studies, it has only been possible
to establish correlation, but not causation. Recent studies have also either
assumed the endogeneity of this link, especially with respect to measures of
market performance of a firm and its environmental performance (e.g., Al-
Tuwaijri et al., 2004 and Clarkson et al., 2011), or even where explicitly tested
(again with respect to market measure of performance), causation has not been
established (see Nelling and Webb, 2009). One exception is the work of
Clarkson et al. (2011) who do find evidence that improvements in financial
resources precede improvements in environmental performance. However, to
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the best of my knowledge, no prior study investigates the causality between
profitability and ESD. In this chapter, I will address both issues. Using
longitudinal data (2005-2009), first I establish the contemporaneous association
between environmental and social disclosures and firm profitability, and then
drawing upon Nelling and Webbs (2009) application of Granger causality test I
address the issue of causality between these variables.
Accordingly, two research questions are explored in this chapter: (1) does firms
operating performance affect their environmental and/or social disclosure? This
question is addressed while controlling for other factors that might affect firms
environmental and/or social disclosure. (2) If profitability is associated with
higher and more comprehensive disclosures, which way does the causality run?
This study makes a number of contributions to the prior literature on

environmental and social disclosures and a firms financial performance. First, it
uses a new, longitudinal data set, namely Bloomberg environmental and social
disclosure scores, which provides a comprehensive measure of a firms
environmental and social disclosures. These scores unlike the limited
environmental measures used by some prior studies (e.g., Hart and Ahuja,
1996, using emission reduction and Al-Tuwaijri et al., 2004, using specific
pollution measures) use a large array of ESG-related factors to develop a firms
E, S, and G score. Next, using this data set, it tests and finds a clear positive
link between different measures of a firms profitability and its environmental
and social disclosures. Furthermore, given the longitudinal nature of the dataset,
it is possible to directly test for causality between environment (E) and social (S)
scores and firm operating profitability. The causality test suggests that the link
runs from profitability to ES and S disclosures. In addition, given that the
dataset covers a wide cross section of industries, the results are not limited in
terms of applicability to specific industries (e.g., Clarkson et al., 2011) or only to
firms meeting certain financial value-relevant criteria (e.g., Al-Tuwaijri et al.,
2004).
4.2 Hypothesis development

According to Lee and Hutchison (2005), there are three main types of factors
that affect CSR disclosure: firm or industry factors (e.g., firm size, industry and
financial ratios), societal factors (e.g., media exposure and stakeholder groups)
100
and individual factors (e.g., governance, attitudes and controls). Figure 4.1
displays the factors affecting the decision to disclose environmental or social
information. In this study, I use various firm/industry factors and societal factors
(as used in prior literature) in determining the decision to disclosure
environmental and social information.
Figure 4.1: Factors affecting the decision to disclose environmental or social

information
Societal Factors
Law and Regulations
Legitimacy
Public Pressure
Publicity
Decision to Disclose
Whether to Disclose?
Firm/Industry
Factors What to Disclose?
Characteristics When to Disclose?
Rational Cost/Benefit Where to Disclose?
Analysis
How Much to Disclose?
Individual Factors
Culture
Attitudes
Adapted from Lee and Hutchison (2005)
Based on prior literature, I explain the predicted sign with respect to each
variable that may affect firms environmental and/or social disclosures in the
following paragraphs7.
7
Based on Lee and Hutchisons disclosure framework and Brammer and Pavelins (2008) study, it is interesting to
explore further other factors that may have an effect on a firms ESD such as firm size and media exposure. Hence, I
develop hypotheses with respect to the control variables rather than simply include them as addition controls in the
empirical models.
101
Firm/Industry Factors
4.2.1 Profitability, slack recourses and ESD

Empirical evidence suggests that there has been a significant change in social
disclosure behaviour of UK listed firms, with a trend towards improvement in the
quality of disclosures (Gray et al., 1995). Despite the improvements in the
quantity and quality of environmental and social disclosures, relatively little
research has examined the link between corporate social/environmental
disclosures and firm financial performance, particularly profitability. Pointing to
the paucity of research on this link, Lee and Hutchison (2005) comment that the
role of profitability in environmental disclosures is incompletely explained.
From an accounting and economics perspective, production and distribution of

voluntary environmental and social information entails costs, even if it is likely to
confer benefits (Verrecchia, 1983). For example, Brammer and Pavelin (2008)
suggest that there are two types of costs involved in making disclosures: the
costs of measuring, verifying, collating and publishing environmental information,
and the loss of strategic discretion associated with making public commitments
to verifiable future actions and/or performance (p.122).
Yet, Prior studies find no link between profitability and environmental

disclosures (Brammer and Pavelin, 2006, 2008; Cormier et al., 2011; Freedman
and Jaggi, 1988; Patten, 1991). One possible reason for the failure of prior
research to clarify this link could be the cross sectional nature of prior studies,
but more importantly, the largely limited and qualitative nature of the information
used to measure disclosure in prior work. Hence, while Freedman and Jaggi
(1988) use disclosures related only to pollution control, Patten (1991) uses
number of pages in the annual reports devoted to such disclosures. Even more
recent work by Brammer and Pavelin (2008) uses five measures of disclosures,
all dummy variables, based on a firms policy stance towards its environmental
responsibility. Hence, one can argue that the failure of prior research to reveal
any meaningful link between environmental and/or social disclosures and firm
profitability could be the limited and largely qualitative nature of the disclosures
used. In this study, I use comprehensive and objective measures of
environmental and social disclosures based on what Clarkson et al. (2008)
consider hard quantitative data that would be difficult for poor environmental
102
performers to mimic. I then analyse the link between the environmental and
social disclosures of a firm and its profitability.
Moreover, the slack resource theory (Penrose, 1956), suggests that the
existence of surplus financial resources or company slack should play an
important role in corporate strategic decision making. There is research which
shows that the availability of resources influence the production and timing of
disclosures. For instance, Li and McConomy (1999) find that the disclosure of
provisions related to removal and site restoration costs by mining and oil and
gas companies was related to the financial health of the companies. Buhr (2002)
investigates the initiation of environmental reports by two Canadian pulp and
paper firms, and notes that profitability was an issue in the timing of the
production of the report by one firm, given that its production was an expense.
Hence, while related empirical evidence suggests that profitability and

availability of resources should matter for making higher and hard
environmental (and social) disclosures, direct evidence testing this link fails to
identify this relation. In this study, I revisit this link using various measures of
profitability and environmental and social disclosure scores from Bloomberg.
Thus drawing upon the costs and benefits analysis (Verrecchia, 1983) and slack
resources theory (Penrose, 1959; Bourgeois, 1981), it can be predicted that
more profitable firms and/or those with more financial slack resources, would
tend to have higher environmental and/or social disclosure scores. Accordingly,
I hypothesise that,
H1: Firms with higher operating profitability/slack tend to have higher

environmental and/or social disclosure scores.
It is important to note that in the above hypothesis the causality is assumed to

run from profitability to environmental and social disclosures. Given the cross
sectional nature of prior studies (e.g., Brammer and Pavelin, 2008), to date it
has only been possible to establish correlation, but not causation. In this study,
drawing upon Nelling and Webbs (2009) application of Granger causality, it
explicitly tests the causality between the sample firms profitability and the level
of their environmental and social disclosures.
103
4.2.2 Firm size and ESD
Hillman and Keim (2001) posit that size matters because it may be related to
the urgency and salience of stakeholder relations. Size captures various factors
motivating firms to issue environmental and social reports such as public
pressure or financial resources (Lang and Lundholm, 1993). Prior studies find a
strong positive relation between firm size and environmental and social
disclosure/performance (Brammer and Pavelin, 2008; Cormier et al., 2011;
Dhaliwal et al., 2011). Based on the economics based disclosure theory,
Clarkson et al. (2008) state that most voluntary disclosure studies control for
firm size as larger firms would have economies of scale with respect to
information production costs. In other words, it is cheaper for larger firms to
provide more disclosure/information. From another perspective, the so called
socio-political theory, larger firms tend to be more visible to public and face
greater pressure from a variety of external stakeholders (Patten, 2002b;
Deegan, 2002), thus larger firms may be driven to make more environmental
and/or social disclosure to legitimize their activities (Brammer and Pavelin,
2006). From both perspectives a positive relation between size and disclosure
is expected. Thus the hypothesis is,
H2: Bigger firms tend to have higher environmental and/or social

disclosure score.
4.2.3 Firm leverage and ESD

From an economics perspective, producing high quality objective disclosures
entail costs (Brammer and Pavelin, 2008; Buhr, 2002; Li and McConomy, 1999).
Brammer and Pavelin (2006) find a negative relationship between
environmental disclosure and leverage. They argue that firms with higher level
of leverage may face more pressure from creditor(s) and it could be more
difficult to raise funds to invest in environmental activities and disclosure. So
firm would have less ability to invest in environmental and social activities and
hence would make lower environmental and social disclosures. In other words,
debt holders as monitors are also concerned about firms ability to repay its debt.
More the funds invested in environmental and social activities and disclosures,
less of the firms profit will be devoted to repay interest and debt to creditors.
Therefore, a negative relation is predicted between a firms leverage and its
ESD.
104
H3: Firms with higher leverage tend to have lower environmental and/or
social disclosure score.
4.2.4 Financial activities and ESD

It is argued that less (internally) profitable firms in terms of having the need to
raise external finance will spend less money on environmental and social
activities, and hence will make less ESD. Ioannou and Serafeim (2012) use
debt issuance and equity issuance separately over total assets to measure
firms financing and find a strong negative relationship between equity and/or
debt issuance and environmental and social score respectively. Conversely,
one can also argue that firms raising financing in debt and equity markets have
a higher propensity for voluntary disclosure to lower their cost of capital
(Clarkson et al., 2008, Dhaliwal et al., 2011). Clarkson et al. (2008) use the
ratio of total amount of debt and/or equity financing raised in fiscal year 2004 to
total assets at the end of fiscal year 2002 to measure firms capital financing.
They find a weak positive relationship between hard environmental disclosure
(i.e., criteria that are difficult for poor performers to mimic such as carbon
emission and water usage) and financial activities, and a strong positive
relationship between soft environmental disclosure (such as policy statement
and environmental initiatives) and financial activities in the inter-industry
analysis. Given the mixed prior evidence, no directional predictions are made
between environmental and/or social disclosure and financial activities. Hence,
it is hypothesised (in null form),
H4: Firms financial activities (in terms of raising capital by issuing equity
and/or debt) are not correlated with their environmental and/or social
disclosure score.
4.2.5 Ownership structure and ESD

Ownership structure can affect the level of monitoring and the extent of
voluntary environmental and social disclosures. Based on principle-agent model,
when ownership is dispersed, shareholders, having little by way of direct
authority over managers, must monitor their activities. In the absence of an
ability to effectively monitor management, the consequent degree of information
asymmetry between the organisation and its shareholders may bring an
adverse investor reaction. Hence, one would expect a diffused ownership
105
structure to carry with it an incentive for a firm to voluntarily provide information
to shareholders through disclosures (Brammer and Pavelin, 2008). Furthermore,
firms with dispersed ownership are expected to be responsive to public
investors information costs (assume that shareholders want relevant ESD),
because no dominant shareholders typically have access to the information
they need (Cormier et al., 2011). In other words, the higher the percentage of
strategic shareholdings, the lower the dispersion of shares and lower the
information asymmetry between strategic shareholders and the firm. Hence,
lower the companies ESD will be. Therefore, a negative relation is expected
between ESD and strategic shareholdings.
H5: Firms with higher strategic shareholdings tend to have lower

environmental and/or social disclosure score.
4.2.6 Industry specific and fixed year effects

Most existing research suggests consideration of environmental sensitivity issue
across industries (Ingram and Frazier, 1980; Wiseman, 1982; Al-Tuwaijri et al.,
2004; Brammer and Pavelin, 2008; Clarkson et al., 2008; Hershcovis et al.,
2009). It is argued that industries play an important role in determining firms
ESD. Brammer and Pavelin (2006) find that industries with a higher
environmental impact tend to make more environmental disclosures. A number
of prior studies associate the following industries Chemical, Energy, Oil and
Gas, Mining and Utilities with high environmental impact (Clarkson et al., 2008;
Brammer and Pavelin, 2008), and attempt to control for fixed industry effect by
using industry dummies (i.e., score one for those industries with high
environmental impact). Brammer and Pavelin (2008) find that firms in
Chemicals and Utilities tend to disclose more environmental information, while
financial companies are not willing to disclose their environmental information.
In this study, industry dummies are also used to control for fixed industry effect
in all regression models. Time fixed effect is also controlled for by creating year
dummies for each year.
Societal Factors
4.2.7 Media exposure and ESD

Based on the legitimacy perspective, a positive relationship is expected
between media exposure and environmental and social disclosures. In other
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words, higher levels of media exposure increase public concerns (i.e.,
companies face more public pressure). Thus firms choose to react through
more environmental or social disclosure to change investors perception.
A number of studies use media exposure as a control variable and find similar
results, although the measurements of media exposure are slightly different.
Cormier et al. (2011) find a strong positive relationship between environmental
news exposure and environmental disclosure, as well as a strong positive
relationship between environmental news exposure and social disclosure. In
their paper, the environmental news content is obtained from the ABI/Inform
Global database based on three different sources business publications,
journals and Canadian newsstand. Brammer and Pavelin (2006) use Factiva
database to measure the incidence of news covered by media and find a
positive relationship without controlling for industry effect. Similarly, Clarkson et
al. (2008) adopt Janis-Fadner coefficient to measure media coverage and
extract data from Factiva database in year 2002, and only find a positive
relationship between soft environmental disclosure and J-F coefficient in the
intra-industry OLS analysis. Hence, it can be hypothesised that,
H6: Firms with more media exposure tend to have higher environmental
and/or social disclosure score.
4.3 Models, methodology and variables
4.3.1 Models tested

The following model is developed to test above-mentioned hypotheses (H1-H6).
ES/E/S Scorei,t = 0 + 1Profitabilityi,t + 2Slacki,t + 3Sizei,t +

4Leveragei,t + 5Financial activitiesi,t + 6Strategic holdingsi,t + 7Media
exposurei,t + [Industry Dummies] + [Year Dummies] + i,t (4-1)
In the above model, the dependent variable is the environmental and social
disclosure score (and its components) as developed by Bloomberg. Return on
sales (ROS) and return on equity (ROE) are used as the measures of firm
profitability in this study. The availability of financial slack is another important
explanatory variable. As already discussed above, based on related literature, a
wide array of control variables are used including: firm size, leverage, financial
activities, strategic shareholdings, media exposure, industry and year fixed
effects.
107
To test for causality between a firms operating profitability and its ES/E/S
disclosure score, Granger causality test is conducted following Nelling and
Webbs (2009) approach8. The models tested are as follows:
ES/E/S Scorei,t = 0 + 1ES/E/S Scorei,t-1 + 2Profitabilityi,t +

3Profitabilityi,t-1 + 4Slacki,t + 5Sizei,t + 6Leveragei,t + 7Financial
activitiesi,t + 8Strategic holdingsi,t + 9Media exposurei,t + [Industry
Dummies] + [Year Dummies] + i,t (4-2)
Profitabilityi,t = 0 + 1Profitabilityi,t-1 + 2ES/E/S Scorei,t + 3ES/E/S
Scorei,t-1 + 4Slacki,t + 5Sizei,t + 6Leveragei,t + 7Financial activitiesi,t +
8Strategic holdingsi,t + 9Media exposurei,t + [Industry Dummies] + [Year
Dummies] + i,t (4-3)
In equation (4-2), ES/E/S score is a function of lagged ES/E/S score, current
profitability and lagged profitability, while in equation (4-3), profitability is a
function of lagged profitability, and current and lagged ES/E/S score. All
variables are defined in the same way as in equation (4-1). If the coefficients 2
and 3 of profitability are significant in equation (4-2), then it can be concluded
that firms profitability Granger causes ES/E/S score. Similarly, if the
coefficients 2 and 3 in equation (4-3) are significant, it can be said that firms
ES/E/S score Granger causes profitability. The coefficients only represent the
sign of the relation not the magnitude (Nelling and Webb, 2009). Both operating
profitability measures are tested in the Granger causality analyses, but only the
results with respect to ROS are reported, as this is the measure found to be
significant.
When estimating econometric models using pooled sample, it is important to

control for model residuals. It is likely that the residuals for each firm may be
correlated across years, as well as correlated across firms within a single year.
Therefore, both industry and year dummies are controlled for. Furthermore, to
avoid serial correlation, the standard errors are clustered by individual firm
identity. In line with appropriate methodology for limited dependent variables,
Tobit regressions are used whenever ES/E/S is the dependent variable i.e., in
Equation (4-1) and Equation (4-2); and OLS regression is used in Equation (4-
3).
8
A dynamic model has been considered as an alternative method. However, based on the suggestions from prior
studies (e.g., Nelling and Webb, 2009), Granger causality test has been widely used. Furthermore, by including both
current and lagged variables, it is possible to examine the direction of causality with respect to both variables.
108
4.3.2 Measurement of variables
The measurement of each variable is explained as follows:
ES/E/S: ES is the sum of environmental and social disclosure score for each
firm for every year. E (S) score refers to the environmental (social) disclosure
score.
Profitability: measured by ROS and ROE which are widely used in related
literature (Freedman and Jaggi, 1988, 1992). ROS is the ratio of earnings
before interest and taxes (18191) to net sales (01001). ROE denotes the ratio of
net income before preferred dividends minus preferred dividend requirement to
last year's common equity.
Slack: slack resource is defined as the natural logarithm of the sum of cash &
short-term investments (02001) and total receivables (02051) (Arora and
Dharwadkar, 2011).
Size: firm size is measured by the natural logarithm of employee number

(07011) (Hershcovis et al., 2009; Padgett and Galan, 2010; Arora and
Dharwadkar, 2011). As suggested by Arora and Dharwadkar (2011), most
previous research measures size according to total sales and total assets, they
prefer to use number of employees as size measure. They state other variables
like ROA or R&D intensity involves total assets or sales in the denominator, a
size measure based on assets or sales could cause multicollinearity problems.
Thus they suggest that use of the number of employees avoids this problem
without loss of information. Furthermore, different size measures such as
natural logarithm of total assets and net sales have been used to test above
hypotheses. Consistent with Arora and Dharwadkars (2011) argument, the
results indicate that there is potential multicollinearity problem with respect to
some independent variables when using either size measure. For example, the
correlation between size (log of employee number) and media is 0.48, while the
correlations is 0.68 by using log of total assets or 0.67 by using log of sales.
Similarly, the correlations between firm size and slack are 0.65 (firm size is
measured as log of employee number), 0.87 (measured as log of sales) and
0.89 (measured as log of total assets) respectively. The correlations indicate
that natural logarithm of employee number is more suitable as size measure in
this study, compared to the other two measures which are highly correlated with
109
other independent variables. Hence, natural logarithm of employee number is
used as firm size measure in this study.
Leverage: total debt (03255) divided by total assets (02999).
Financial activities: this variable is captured by the ratio of net proceeds from
sale/issue of common and/or preferred stock (04251) during the year to total
assets (02999) at the beginning of the year.
Strategic shareholdings (NOSHST): it is measured as the percentage of total

shares in issue held strategically and not available to ordinary shareholders.
Holdings of 5% or more are counted as strategic.
Media exposure: it represents a firms media sensitivity to environmental issues,

which is measured as the number of news exposed by Nexis@UK 9 that
provides searchable archives of news content from global sources. The number
of environmental news is obtained by searching a firms name and any one of
the following terms environment sustainability, waste management, pollution
and environmental award (as used by Cormier et al., 2011) within all English
language news published over the world. One year period is specified to be 1
January 200X to 31 December 200X. Furthermore, moderate similarity of
duplicate options10 is allowed. Since there is big variation of news exposed, the
media exposure variable is transformed by taking natural logarithm. However,
there are many firms with zero piece of news. I add one to the number of news
exposed for each firm before taking the logarithm. One limitation of this
measure is that the number of news exposed varies slightly across time. To
brief the explanation, media exposure denotes the number of news exposed by
Nexis@UK11.
9
This database gives access to both news and company information. News coverage contained in this database
comes from national and local newspapers, press releases, transcripts of TV broadcasts, newswires, statistical
bulletins, magazines and trade journals. Company option provides access to financial reports and company profiles
from around the World.
10
Duplicate options let you choose whether or not you want to use similarity analysis to process your search results.
Similarity analysis analyses a results list, identifies documents that have similar content, and groups the similar
documents together. Moderate similarity means documents with relatively less similarity can be included in the
same group of similar documents. (LexisNexis@help)
11
The variables used to capture media exposure are derived from Cormier et al.s (2011) measurement. However, it
can be argued that a more complicated measurement can be used. For example, the Factiva database can be used
to measure the incidence of news covered by media (e.g., Brammer and Pavelin, 2008). When I collect the data for
media exposure variable, the Factiva database cannot be accessed. Hence, I use some variables (as also used by
Cormier et al. 2011) to capture media exposure and manually collect firms environmental news from Nexis@UK
database.
110
Industry (ICBIC) and year dummies: based on FTSE/DJ Industry Classification
Benchmark (ICB) 2008 industry classification, firms are grouped in one of the
following industries: Oil&Gas (0001), Basic materials (1000), Industrials (2000),
Consumer goods (3000), Health care (4000), Consumer services (5000),
Telecommunications (6000), Utilities (7000) and Technology (9000). Financials
(8000) are not included in this study. The industry (year) dummy variables take
a value of one if a firm operates in that sector (year); zero otherwise.
4.4 Sample and data

The sample is a pooled cross-section and time series data over five years
(2005-2009), and consists of FTSE350 companies excluding financial
institutions 12 which need to follow different environmental and social related
regulations like the Equator Principles (see Macve and Chen (2010) about
bank voluntary disclosure, i.e. environmental and social issues in project
financing). By absolute number, there are 327 out of the FTSE all share
constituents that provide some sort of ESG data. However, firms without full
ESG data are dropped out in this study. Hence, based on the availability of full
ESG data, the final sample consists of 152, 214, 165, 87 and 11 for the year
2009, 2008, 2007, 2006 and 2005 respectively. In total, there are 629 firm-year
observations. Every effort has been made to collect all firms with ESG data
available over the five years.
Industries are classified by using FTSE/DJ single-digit Industry Classification

Benchmark (ICB) March 2008 version. This leads to 9 single-digit industry
classifications in the sample: Oil & Gas, Basic Materials, Industrials, Consumer
Goods, Health Care, Consumer Services, Telecommunications, Utilities and
Technology. Table 4.1 gives the break-down of industries covered in the sample
over the five-year period. As Table 4.1 shows general industrials and consumer
services account for the bulk of companies in the sample. Within industrials fall
mostly heavy manufacturing industries like construction and building materials,
defence and aerospace, and other industrial engineering industries like
electrical components and equipment and electronic equipment. Consumer
services include food and drug retailers, general retailers, media, and travel and
12
I have analysed a few sustainability reports of some financial companies such as HSBC and Barclays, and found
their disclosure formats and content are dramatically different from other non-financial companies. Moreover,
some financial companies (especially smaller ones) do not provide relevant information about their ESD or control
variables. Thus, financial companies are excluded for this study.
111
leisure industries. In short, the sample represents a wide range of industries
over five years.
Table 4.1 Number of sample companies in each sector by year

Industry Industry 2005 2006 2007 2008 2009 Total
Code
0001 Oil & Gas 2 9 11 16 12 50
1000 Basic Materials 2 9 11 17 14 53
2000 Industrials 2 27 52 65 37 183
3000 Consumer Goods 2 9 19 25 20 75
4000 Health Care 0 3 5 5 5 18
5000 Consumer Services 3 17 47 59 43 169
6000 Telecommunications 0 3 4 5 3 15
7000 Utilities 0 4 8 10 6 28
9000 Technology 0 6 8 12 12 38
Total 11 87 165 214 152 629
The disclosure data is obtained from Bloomberg. Bloomberg assigns

environmental, social and governance disclosure scores to firms based on data
points (100 different data points including 60 environment, 26 social and 14
governance related data points) collected by analysts via multiple sources
including annual reports, standalone sustainability reports and company
websites. The disclosure data is available from 2005 (generally goes back to
2007, sometimes 2006 and occasionally 2005). Within each E, S and G
category, the score of individual firm is then expressed in percentage, so as to
make data comparable across firms and sectors. The score is also tailored to
be industry specific, so that each firm is evaluated only in terms of the data that
is relevant to its industry sector. E.g., gas flared is only used to score firms in oil
and gas industry. A data point like phones recycled is only used to score firms
in the telecommunication industry. Furthermore, the data points are also
weighted in terms of importance by ESG practitioners. For example, Green
House Gas emissions or number of independent directors would be weighted
more heavily than other data points. Hence, the scores not only capture the
quantity but the quality of environmental, social and governance disclosures.
See Appendix 2 for full detail of the data points collected under each E, S, and
G category. All Accounting data is collected from Worldscope and financial data
is from Datastream. Environmental news data is obtained from Nexis@UK.
112
4.5 Results
4.5.1 Descriptive and correlation statistics

Table 4.2 provides the descriptive statistics for all variables used in the
analyses, while Table 4.3 provides the correlations between these variables.
Table 4.2 Descriptive statistics
Variable Observation Median Mean S.D. Min Max

ES 617 49.00 54.38 23.85 11.10 124.39
E 619 19.51 22.02 13.53 2.33 63.57
S 627 28.07 32.10 12.87 4.69 70.18
ESt-1 380 51.12 55.91 24.33 11.90 124.39
Et-1 381 20.93 22.72 13.76 2.33 62.79
St-1 388 28.07 32.84 13.16 4.69 70.18
Slack 607 6.07 6.20 1.53 2.21 11.11
ROS 622 0.12 0.15 0.27 -1.28 5.42
ROE 600 0.17 0.24 0.46 -1.10 5.02
ROSt-1 620 0.13 0.16 0.28 -1.93 5.42
ROEt-1 605 0.19 0.26 0.43 -2.41 4.71
Size_emp 622 9.34 9.29 1.62 2.56 13.30
Leverage 627 0.23 0.25 0.19 0 1.33
Fin_acts 627 0.002 0.02 0.07 -0.01 0.85
Str_holds 629 0.16 0.20 0.17 0 0.83
Media 629 1.39 1.61 1.53 0 6.53
Notes: ES denotes the sum of environmental and social disclosure scores; E denotes environmental
disclosure; S denotes social disclosure; ESt-1, Et-1 and St-1 refer to one year lagged ES, E and S score
respectively; Slack is measured as the natural logarithm of the sum of cash & short term investment and
total receivables; ROS denotes the ratio of earnings before interest and taxes to net sales; ROE denotes
the ratio of net income before preferred dividends minus preferred dividend requirement to last year's
common equity; ROSt-1 and ROEt-1 refer to one year lagged ROS and ROE; Size_emp denotes firm size
and is measured as the natural logarithm of employee number; Leverage is defined as the ratio of total
debt to total assets; Fin_acts is defined as financial activities and measured as the ratio of net proceeds
from sale/issue of common and/or preferred stock during the year to total assets at the beginning of the
year; Str_holds refers to strategic shareholdings and is measured as the percentage of total shares in
issue held strategically and not available to ordinary shareholders (holdings of 5% or more are counted as
strategic); Media denotes media exposure and is measured as the natural logarithm of the number of
environmental news exposed by media plus one.
Table 4.2 shows that the mean value of ES, i.e., the summed E and S scores, is
54% (about 56% for lagged ES score). The summed ES score is the simple
summation of the individual E and S scores of the firms, and could be
interpreted as the average aggregate E and S disclosure of the firm. As for the
individual scores, S has an average score of 32%, and E of 22%. The mean
values of lagged E and lagged S are 23% and 33% respectively. The average
slack is 6.2, equivalent to the mean value of GBP 494 million. Average ROS
113
and ROE are 15% and 24% respectively. The mean value of lagged ROS and
lagged ROE are 16% and 26%. Average firm size is 9.29 (i.e., about 10851
employees). The average leverage is 25%. The mean values of strategic
shareholdings and financial activities are 20% and 2% respectively (i.e., 20% of
total shares in issue are held by strategic shareholders, and 2% of total assets
are generated from sales or issue of common and/or preferred stock during the
year). The mean of the log of media exposure is 1.6. In other words, the
average number of environmental news to which a firm is exposed in one year
is 5. All median values are very closed to mean values, which indicates that the
sample is not affected by outliers. The median values are normally distributed.
Full definition of variables used and their data sources are given in Appendix 3.
Of note, the number of observations for each variable varies slightly, based on
the availability of data for the variable.
The pair-wise correlation matrix is displayed in Table 4.3. Table 4.3 shows a
high correlation among ES, E, and S score and their lagged values, which
implies stickiness of E and S scores across years. In other words, it seems that
once a firm sets a precedence of voluntary reporting in a particular area, it tends
to continue doing so in subsequent periods (consistent with the costs of
commitment argument). It is worth mentioning the relationship between
profitability and environmental/social score. It can be seen that there is a
positive link between ROS and E score, while lagged ROS is positively
correlated with E, ES and lagged E scores. Although there is no significant link
between profitability and social score, the sign with respect to this relationship is
positive. As mentioned in the section 4.3.2 measurement of variable, there is
moderately high correlation between firm size and slack (0.65) as well as
between firm size and media exposure (0.67). Hence, I performed variance
inflation factor (VIF) checks for all regression analyses to ensure that there are
no multicollinearity concerns, and all values of VIF tests are less than 10 (VIFs
exceeding 10 are signs of serious multicollinearity requiring correction).
114
Table 4.3 Pair-wise correlation matrix
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)
1 ES 1.00
2 E 0.91*** 1.00
3 S 0.90*** 0.64*** 1.00
4 ESt-1 0.92*** 0.84*** 0.84*** 1.00
5 Et-1 0.83*** 0.88*** 0.62*** 0.91*** 1.00
6 St-1 0.85*** 0.63*** 0.91*** 0.90*** 0.64*** 1.00
7 Slack 0.60*** 0.52*** 0.56*** 0.64*** 0.57*** 0.59*** 1.00
8 ROS 0.05 0.07* 0.01 0.07 0.08 0.02 0.02 1.00
9 ROE 0.05 0.05 0.05 0.05 0.03 0.06 0.00 0.20*** 1.00
10 ROSt-1 0.10*** 0.12*** 0.05 0.08 0.10** 0.02 0.04 0.28*** 0.03 1.00
11 Size_emp 0.44*** 0.40*** 0.40*** 0.45*** 0.42*** 0.41*** 0.65*** -0.21*** 0.00 -0.20*** 1.00
12 Leverage 0.00 0.01 -0.01 0.03 0.02 0.01 -0.04 0.01 0.14*** 0.06 0.12*** 1.00
13 Fin_acts 0.01 0.02 0.00 -0.01 0.00 -0.01 -0.02 -0.03 -0.06 0.02 -0.08** -0.08* 1.00
14 Str_holds -0.26*** -0.28*** -0.18*** -0.29*** -0.30*** -0.22*** -0.31*** 0.04 0.02 0.03 -0.22*** -0.08** -0.09** 1.00
15 Media 0.55*** 0.49*** 0.51*** 0.59*** 0.52*** 0.55*** 0.66*** 0.06 0.04 0.06 0.48*** 0.07* -0.02 -0.22*** 1.00
Notes: : ES denotes the sum of environmental and social disclosure scores; E denotes environmental disclosure; S denotes social disclosure; ESt-1, Et-1 and St-1 refer to one
year lagged ES, E and S score respectively; Slack is measured as the natural logarithm of the sum of cash & short term investment and total receivables; ROS denotes the
ratio of earnings before interest and taxes to net sales; ROE denotes the ratio of net income before preferred dividends minus preferred dividend requirement to last year's
common equity; ROSt-1 refers to one year lagged ROS; Size_emp denotes firm size and is measured as the natural logarithm of employee number; Leverage is defined as the
ratio of total debt to total assets; Fin_acts is defined as financial activities and measured as the ratio of net proceeds from sale/issue of common and/or preferred stock during
the year to total assets at the beginning of the year; Str_holds refers to strategic shareholdings and is measured as the percentage of total shares in issue held strategically
and not available to ordinary shareholders (holdings of 5% or more are counted as strategic); Media denotes media exposure and is measured as the natural logarithm of the
number of environmental news exposed by media plus one. *, **, *** indicates significance at the .10, .05, .01 levels respectively.
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4.5.2 Regression analysis
Table 4.4 shows the results of testing H1-H6 using two profitability measures ROS
and ROE13.
Table 4.4 Tobit regressions explaining ES/E/S score (Equation 4-1)

Dependent variable
Predicted ES E S
Sign (1) (2) (1) (2) (1) (2)
Intercept -7.53 -6.30 -9.59** -7.73 2.14 1.39
(-0.97) (-0.78) (-2.02) (-1.56) (0.49) (0.32)
ROS + 2.18 3.55*** -1.49
(0.80) (2.52) (-0.96)
ROE + 3.75* 2.09** 1.85
(1.63) (1.99) (1.22)
Slack + 3.47** 3.52*** 1.51** 1.66** 1.85** 1.78**
(2.44) (2.60) (2.00) (2.23) (2.23) (2.27)
Size_emp + 3.21** 3.09** 1.77** 1.50** 1.55* 1.70**
(2.32) (2.27) (2.38) (1.95) (1.91) (2.22)
Leverage - -2.65 -6.09 -3.04 -3.87 -0.42 -3.45
(-0.42) (-0.81) (-0.86) (-0.86) (-0.11) (-0.89)
Fin_acts +/- -8.95 -10.55 0.78 -0.71 -9.30 -9.34
(-0.64) (-0.73) (0.08) (-0.08) (-1.42) (-1.35)
Str_holds - -13.50** -14.13** -11.54*** -11.93*** -2.23 -2.53
(-1.95) (-2.12) (-2.92) (-3.01) (-0.57) (-0.70)
Media + 2.97*** 2.73*** 1.59*** 1.45** 1.42*** 1.31**
(2.88) (2.65) (2.69) (2.41) (2.50) (2.36)
Industry Yes Yes Yes Yes Yes Yes
effect
Year Yes Yes Yes Yes Yes Yes
effect
N 592 566 594 568 601 575
Pse-R2 7.09% 7.05% 6.24% 6.06% 6.92% 7.12%

F-test 16.77*** 16.02*** 12.48*** 11.46*** 14.42*** 15.34***
Notes: ES denotes the sum of environmental and social disclosure scores; E denotes environmental disclosure;
S denotes social disclosure; ROS denotes the ratio of earnings before interest and taxes to net sales; ROE
denotes the ratio of net income before preferred dividends minus preferred dividend requirement to last year's
common equity; Slack is measured as the natural logarithm of the sum of cash & short term investment and total
receivables; Size_emp denotes firm size and is measured as the natural logarithm of employee number;
Leverage is defined as the ratio of total debt to total assets; Fin_acts is defined as financial activities and
measured as the ratio of net proceeds from sale/issue of common and/or preferred stock during the year to total
assets at the beginning of the year; Str_holds refers to strategic shareholdings and is measured as the
percentage of total shares in issue held strategically and not available to ordinary shareholders (holdings of 5%
or more are counted as strategic); Media denotes media exposure and is measured as the natural logarithm of
13
I check the impact of missing observations on the results. First, I generate a new variable as the sum of all variables used
on Table 4.4. If any value of the above variables is missing, then the new variable will have a missing value. Then I recode
the new variable as a dummy variable i.e., if there is any missing value, it will be 1; if there is no missing value, it will be 0.
Hence, 1) I check the number of observations left with non-missing values; 2) I run a summary statistics and compare with
the original descriptive table; and 3) Re-run all regressions on Table 4.4 with non-missing values, and compare the results.
The results show that there are 565 observations left with non-missing values. The summary statistics (e.g., mean values)
are very closed to the original table. Finally, all results with non-missing values are similar to the results on Table 4.4.
Therefore, the results are not affected by any missing values, and the descriptive statistics provided earlier are reliable to
carry out the above analysis.
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the number of environmental news exposed by media plus one. The dependent variables are ES, E and S scores
as indicated by the columns. Profitability measured as ROS is used in Model (1), and ROE is adopted in Model
(2). T-statistics are in parentheses. *, **, *** indicates significance at the .10, .05, .01 levels respectively.
Standard errors are computed with procedure allowing for clustering across observations corresponding to the
same firms for different years.
As Table 4.4 shows, when E score is the dependent variable, the coefficients on
ROS and ROE are both positive and significant (p<0.05). When ES is the dependent
variable, the coefficient on ROE is positive and marginally significant (p<0.1).
However, no significant relation is found between operating profit and S score.
Perhaps firms with higher ROS tend to make more proactive environmental
investments and provide more environmental information in the current year. Social
disclosures which pertain more to employee relations may not require significant
current cash outlays, hence, may not be currently profit-sensitive. These findings
largely support H1, and are consistent with both the actual as well as the opportunity
costs hypotheses. First, consistent with the actual costs argument, it is found that
profitable firms are better able to afford making higher and better environmental
disclosures. Moreover, the findings of a positive link of both E and S disclosures with
slack resources, suggests that such firms can also bear the opportunity costs of
commitment implied by such disclosures. Managers in firms with more slacks are
more likely to have access to resources which would allow them to honour their
environmental and social commitments thus lowering their opportunity costs of
making such disclosures. Taken together, these findings are consistent with the
economics based arguments that profitable firms with superior financial resources,
particularly slack resources, tend to be in a better position to bear both the actual as
well as the opportunity costs of making specifically higher environmental disclosures.
Furthermore, these results are consistent with slack resources theory, which
suggests that firms with more slack resources are more willing and able to invest in
environmental and social areas including E and S reporting. This behaviour of firms
is consistent with the suggestions of Heal (2005) that to make the greatest impact,
firms not only need to undertake CSR but also need to be seen to be doing so
hence the need for relevant disclosure.
With respect to other variables, the results are found to be consistent with my
expectations. Consistent with prior findings (Brammer and Pavelin, 2006 and
Cormier et al., 2011), there is a positive relation of E and S disclosure scores with
both size (H2) and media exposure (H6) in all regressions. These findings suggest
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that larger firms with greater exposure to public media tend to provide more
environmental and social information. This result is also consistent with the socio-
political and legitimacy theory based arguments, implying that larger firms which are
more in the public eye tend to legitimize their operations by providing more
environmental and social information (Cho and Patten, 2007). Again, consistent with
prior findings (Cormier et al., 2005), a negative relation is found between strategic
shareholdings and ES and E disclosures (H5). This finding suggests that firms
having more concentrated shareholdings with implied lower information asymmetry
between the firm and its investors tend to disclose less ES and E information. It may
also mean that firms with concentrated shareholdings are less stakeholder-oriented
and tend to invest less in CSR related activities, hence, have less to report in these
areas. Leverage (H3) and financial activities (H4) are not found to be related to either
E or S disclosures.
Prior empirical evidence has emphasized industry effect. For example, Cho and
Patten (2007) reveal that firms operating in environmentally sensitive industries such
as oil exploration, paper manufacturing, chemical and allied products, petroleum
refining and metals, disclose more non-litigation-related environmental information in
order to achieve social legitimacy. Although the results with respect to industry
effects are not reported, there are some significant results worth mentioning.
Consistent with existing literature - those industries with a high environmental impact
tend to make more environmental disclosure (Brammer and Pavelin, 2008), the
findings of this study also suggest that industry effects matter for firms
environmental and social disclosures. Generally speaking, companies in the Basic
materials, Consumer goods, Health care and Utilities industries provide more
environmental and social related information, while companies in the
Telecommunications and Technology industries provide less environmental and
social related information. The VIF tests of all regressions are less than 10, thus
there is no multicollinearity issue for above results.
Table 4.5 reports the results of Granger causality test with respect to ES, E and S
score and firm profitability. There is no evidence of causality either ways using ROE
as a profitability measure, which may be due to potential multicollinearity between
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ROE and lagged ROE14. However, there is some evidence of causality using ROS as
a profitability measure, which is reported as follow:
Table 4.5 Granger causality test (Equation 4-2 and 4-3)

Dependent variable
ES ROS E ROS S ROS
Intercept -4.56 0.45* -3.98 0.56*** -1.60 0.58**
(-1.21) (1.77) (-1.57) (2.54) (-0.66) (2.30)
ES -0.001
(-1.02)
ESt-1 0.93*** 0.002
(35.19) (1.04)
E 0.001
(0.85)
Et-1 0.88*** 0.002
(26.93) (0.44)
S -0.005
(-1.57)
St-1 0.86*** 0.003
(23.37) (1.47)
ROS -1.22 0.47 -1.58
(-1.25) (0.69) (-1.42)
ROSt-1 1.66*** 0.14 0.76 0.13 0.91* 0.14
(2.59) (1.29) (0.82) (1.06) (1.63) (1.34)
Slack -0.46 0.01 -0.49 0.01 0.13 0.02
(-0.74) (0.85) (-1.23) (0.84) (0.33) (1.12)
Size_emp 1.47*** -0.05 1.05*** -0.05 0.69* -0.04
(2.69) (-1.47) (2.91) (-1.62) (1.80) (-1.59)
Leverage 1.96 0.08 0.93 0.08 2.29 0.10*
(0.74) (1.37) (0.49) (1.42) (1.35) (1.91)
Fin_acts -0.59 -0.09 3.33 -0.09 -4.29 -0.14
(-0.12) (-0.92) (0.83) (-0.93) (-1.44) (-1.30)
Str_holds 1.45 0.08 -0.60 0.09 1.63 0.07
(0.50) (0.76) (-0.27) (0.75) (0.96) (0.72)
Media -0.38 0.01 0.06 0.01 -0.33 0.01
(-0.74) (0.60) (0.17) (0.57) (-1.13) (0.67)
Industry Yes Yes Yes Yes Yes Yes
effect
Year Yes Yes Yes Yes Yes Yes
effect
N 365 365 366 366 372 372
Clusters 175 175 175 175 177 177
Pre-R2 22.04% 16.19% 19.79% 16.96% 22.36% 17.17%
/(R2)
F-test 245.28*** 20.45*** 139.19*** 19.70*** 142.80*** 24.96***
Notes: This table reports the results of causality models with Tobit specifications when dependent variable is ES,
E or S score. ES denotes the sum of environmental and social disclosure scores; E denotes environmental
disclosure; S denotes social disclosure; ESt-1, Et-1 and St-1 refer to one year lagged ES, E and S score
respectively; ROS denotes the ratio of earnings before interest and taxes to net sales; ROSt-1refers to one year
14
The pair-wise correlation between ROE and lagged ROE is 0.37 (p=0.00). Nelling and Webbs (2009) findings imply that
current ROA and lagged ROA are highly correlated. When both of them are included as independent variables in the
regression to test causality between ROA and CSR score, no significant result is found between lagged ROA and CSR score.
119
lagged ROS; Slack is measured as the natural logarithm of the sum of cash & short term investment and total
receivables; Size_emp denotes firm size and is measured as the natural logarithm of employee number;
Leverage is defined as the ratio of total debt to total assets; Fin_acts is defined as financial activities and
measured as the ratio of net proceeds from sale/issue of common and/or preferred stock during the year to total
assets at the beginning of the year; Str_holds refers to strategic shareholdings and is measured as the
percentage of total shares in issue held strategically and not available to ordinary shareholders (holdings of 5%
or more are counted as strategic); Media denotes media exposure and is measured as the natural logarithm of
the number of environmental news exposed by media plus one. T-statistics are in parentheses. *, **, *** indicates
significance at the .10, .05, .01 levels respectively. Standard errors are computed with procedure allowing for
clustering across observations corresponding to the same firms for different years.
Table 4.5 shows that when ES score is the dependent variable, a positive and
significant relationship is found between ES score and lagged ROS. In other words,
lagged ROS Granger causes ES score, which implies that firms with higher ROS in
prior year provide more ES information in current year. Similar result is generated
with respect to social disclosure. However, when ROS is the dependent variable;
neither ES/E/S score nor lagged ES/E/S score is significant, which indicates that
causality tends to run from profitability to ES and S disclosures. These findings are
quite interesting when compared to the findings in Table 4.4. Taken together, these
findings suggest that while current operations and current operating performance
matter for current environmental disclosures, past operating performance drive
current social disclosures. To explain these results, one could reason that current
operations impact current environmental performance and current environmental
disclosures, while results of past operating performance and past investments in
social responsibility arena such as investments in employee training (whose effects
only become subsequently evident) are subsequently reported. All VIF tests are less
than 10.
4.5.3 Robustness test

Additional control: stakeholder sensitive governance
Drawing upon the ideas of stakeholder theory, first proposed by Freeman (1984) and
recently built upon by Jensen (2010), it can be argued that firms with boards which
better reflect governance and stakeholder-sensitivity are likely to have higher
environmental and social disclosures. Jensen (2010) argues that environmental and
social strategy is designed at the board level. In order to maximise value of a firm,
boards not only need to satisfy but enlist the support of all corporate stakeholders,
including employees, suppliers, customers, and local communities. Sharing relevant
information with these stakeholders via higher disclosures including environmental
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and social disclosures is important in enlisting this support. Accordingly, the extent to
which the board reflects this commitment to key stakeholders by for example,
complying with GRI criteria (i.e., comprehensive guidelines about a firms
environmental and social reporting); by disclosing its political donations; and by
including women on the board (it is argued that women are concerned primarily with
the welfare of other people, helpfulness, kindness, sympathy, sensitivity, nurturing
and gentleness Eagly et al., 2003), would have a significant impact on its
environmental and social disclosures.
There is also a suggestion in the disclosure literature that firms which have better
quality of corporate governance are likely to be more transparent and accordingly
make higher and better quality environmental and social disclosures (Brammer and
Pavelin, 2008; Rankin et al., 2011; Cormier et al., 2011). For example, Rankin et al.
(2011) find the quality of corporate governance relates to the decision to disclose
GHG information. They argue that a firm with an environmental committee is more
likely to publicly disclose their emissions levels, and presents more credible
disclosure in a voluntary disclosure regime to indicate its commitment to climate
change. Indeed, they find firms that had instituted an environmental committee are
more likely to provide more credible disclosures about climate change. In addition,
Cormier et al. (2011) find a positive association between board size and
environmental and social disclosures, as well as a positive relation between audit
committee size and social disclosure.
To test this, the aggregated governance G disclosure score from Bloomberg is

added in Equation (4-1), while keeping all other variables the same. The G score
from Bloomberg captures the governance related disclosures of a firm, and is value
weighted with higher weights assigned to factors like board independence and other
such disclosures of good governance practices. The G score as one of the
independent variable covers some key board recommendations that the UK code of
corporate governance recommends firms to comply with, including independent
director representation and separation of CEO and chair position. It also covers
aspects that clearly reflect a boards own stakeholder orientation. These include
commitment to: board diversity, as measured by the presence of women on board;
promoting transparency and trust, via disclosing details of political donations; and
demonstrating overall stakeholder sensitivity, via disclosing ethics policy and
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importantly adherence to GRI criteria related to environmental and social reporting.
Hence, based on the data points covered in the G score it is reasonable to assume,
that the higher a firms G score, the more stakeholder committed the firms board is
likely to be.
It is found the G score to be highly positively significant in all models, that is those
modelling ES, E and S, suggesting that firms making higher governance disclosures
(i.e., more stakeholder sensitive governance), are also more likely to make higher
environmental and social disclosures. These findings not only support the theoretical
arguments of Jensen (2010), but also lend further support to the empirical findings of
Cormier et al. (2011) who emphasize the role of governance in promoting
environmental and social disclosures. By using an aggregated measure of
stakeholder sensitive governance, the results indicate overall governance score of a
firm has a positive effect on its environmental and social disclosures. However, the
main results are reported without G, as it was found to be a source of
multicollinearity problem in causality tests. Hence, to keep the main results and
causality test results comparable, main results are reported without G in Table 4.4.
4.6 Discussion and conclusions

In this chapter, the link between a firms environmental and social disclosures and its
operating profitability is examined. Consistent with H1, it is found that more profitable
firms tend to make more environmental and social disclosures. These findings are
consistent with the accounting and economics based arguments that environmental
and social disclosures are a real as well as an opportunity cost that more profitable
firms with higher slack resources are better able to afford. Moreover, the result of
Granger causality test reveals that while current operating performance (which is
relevant for current environmental impact) matter for current environmental
disclosures; it is the past operating performance that drives current social
disclosures. The reason for the latter finding could be that effects of past profitability
and presumably past investments in social arena (like investments in employee
training) become apparent only in the subsequent period, which is then reported.
From an aggregated level, a firms environmental and social disclosure is driven by
its prior operating profitability. To the best of my knowledge, this empirical chapter is
the first UK study using Granger causality methodology to examine the causal
122
relation between ESD and operating profitability, and provides some empirical
evidence that causality runs from prior profitability to ESD.
It is important to point out two limitations of the analysis in this chapter. One is
whether higher disclosures imply better underlying environmental and social
performance. While some earlier studies such as Patten (2002a) suggests that poor
environmental performers tend to disclose more environmental information, in order
to gain socio-political legitimacy for their operations; there is now a growing body of
research that shows a positive relation between higher environmental disclosures
and better environmental performance (e.g., Al-Tuwaijri et al., 2004; Clarkson et al.,
2008; and Clarkson et al., 2011) hence support for the assumption. The second
issue to consider is whether more is better in itself. In other words, do higher
disclosures convey more relevant information or do they serve to confound
stakeholders? As Bloomberg scores are based largely on objective and industry
relevant environmental and social measures, higher scores should reflect an effort
on the part of firms to promote accountability, transparency and trust between itself
and its various stakeholders. Hence, the assumption is that the more environmental
and social disclosure is better. In addition, a subsample of year 2009 has been
analysed. Based on Clarkson et al. (2008) disclosure framework, I create eight CSR
disclosure indicators, manually collect the information from firms sustainability
reports or websites, read and codify the information. The aggregated score has also
been used as a replacement of CSR strategy measurement in Chapter 6.
In the next chapter, the link between a firms environmental and social disclosures
and its market value, employee productivity and carbon eco-efficiency are examined.
The analysis of disclosures with employee productivity and carbon eco-efficiency
provides some support for the assumption (in this chapter) of a positive link between
social and environmental disclosures and corresponding performance.
123
Chapter 5: Environmental and social disclosures and firms market
values, employee productivity and carbon eco-efficiency
5.1 Introduction
As shown in Chapter 4, the link between firms ESD and their operating profitability
has been tested within the context of the determinants of ESD disclosure. However,
less is known about the link between firms ESD and their market values. Moreover,
prior analysis in Chapter 4 assumes ESD to reflect superior E and S performance. In
this chapter, I provide some support for this assumption by testing the link between
ESD and employee productivity and carbon eco-efficiency, as measures of S and E
performance respectively.
With increasing pressure on businesses from socially responsible investors as well

as from other stakeholders to address their environmental and social related
responsibilities, developing a better understanding of the economic relevance of
environmental and social disclosures becomes imperative. From a capital markets
perspective, public disclosures of how a firm addresses its environmental and social
challenges can have significant financial implications. To the extent that these
disclosures reveal a firms current environmental and social performance as well as
its future potential, investors can gauge how well the firm is currently managing its
environmental and social risks, and how well it is equipped to tackle these in the
future.
Based on above arguments, some studies have examined the link between a firms
environmental disclosures and its market performance (e.g., Freedman and Patten,
2004; Lorraine et al., 2004; Shane and Spicer, 1983; Stevens, 1984). All of these
studies find a negative stock market response to the release of environmental
information. These findings however, are quite contrary to the expectations based on
voluntary disclosure theory (Verrecchia, 1983) that higher and better quality
environmental (and social) disclosures should help reduce information asymmetry
between the firm and its investors (Al-Tuwaijri et al., 2004; Brammer and Pavelin,
2008). Recent work in this area however, has been more in line with this theoretical
reasoning. For example, Cormier et al. (2011) find that environmental and social
disclosures help reduce the information asymmetry (as measured by the stocks bid-
ask spread and its share price volatility) between the firm and its investors. Hence, it
124
can be argued that higher and better quality of environmental and social disclosures
can be a reflection of superior environmental and social performance (Verrecchia,
1983), which leads to lower information asymmetry between a firm and its investors,
and lower its firm risks, thus higher its market value. In this chapter, I extend this
analysis by examining the link between a firms environmental and social disclosures
and its market value.
In this chapter, I attempt to explore the relation between a firms environmental and
social disclosures and its market value (i.e., whether a firms environmental and/or
social disclosures affect its market value is examined). As mentioned in Chapter 3, I
also test the link between ESD and ESP from two aspects (i.e., whether more
environmental (social) disclosure reflects better environmental (social) performance).
One is the link between a firms social disclosure and its employee productivity; the
other is the association between a firms environmental disclosure and its carbon
eco-efficiency. A longitudinal dataset on UK listed firms for the years 2005-2009 is
used to test these three sets of relationships in this study.
This study makes a number of contributions to existing literature. First, it finds a

positive association between combined ES and S disclosures and a firms market
value. The finding in some ways is surprising, given the preponderance in the
corporate social responsibility literature on studying the association between
environmental performance and economic performance. The findings suggest that
contrary to environment, it is the social disclosures that the market values. In other
words, investors seem to care not about the environment alone per se, but the
overall approach that the firm takes towards its key stakeholders (particularly the
employees), as revealed by its social disclosures. Moreover, the results of sub-tests
provide further evidence of the economics based disclosure theory, that is, more
environmental (social) disclosure reflects better environmental (social) performance
captured by a firms better carbon eco-efficiency (higher employee productivity).
5.2 Hypotheses development

According to Jensens (2010) enlightened stakeholder theory, in order to maximize a
firms market value, managers who play a critical role in leading and sustaining the
firms strategic vision, must not only satisfy, but also enlist the support of all
125
corporate stakeholders. In other words, meet other stakeholders needs such as
employees and the environment to assure the long-term sustainability of the firm.
5.2.1 ESD and firms market values

With the growing investor demand for better disclosures, Lee and Hutchison (2005)
comment that for gaining credibility, investors require disclosures to be externally
audited. It appears that firms are now increasingly responding to the growing societal
and shareholder pressures, by making higher and better quality environmental and
social disclosures.
From a capital markets perspective, public disclosures of how a firm addresses its
environmental and social challenges can have significant financial implications. To
the extent that these disclosures reveal a firms current environmental and social
performance as well as its future potential, investors can gauge how well the firm is
currently managing its environmental and social risks, and how well it is equipped to
tackle these in the future. Based on the argument that environmental disclosures can
have significant financial implications such as cash flow outlays related to pollution
abatement costs and/or investments in environmentally friendly technologies
(Freedman and Patten, 2004), some studies have examined the link between a
firms environmental disclosures and its share price performance (Freedman and
Patten, 2004; Lorraine et al., 2004; Shane and Spicer, 1983; Stevens, 1984). All find
a negative stock market reaction to release of environmental information. These
findings are quite contrary to the expectations based on voluntary disclosure theory
(Verrecchia, 1983) that higher and better quality i.e., hard environmental (and social)
disclosures should help reduce information asymmetry between the firm and its
investors (Al-Tuwaijri et al., 2004; Brammer and Pavelin, 2008; Cormier et al., 2011).
Perhaps, the specific disclosure items or regulatory events used to measure
disclosure in most such studies, as pointed out by Aerts et al. (2008) could be
responsible for the negative stock market impact documented. For example, Shane
and Spicer (1983) study the stock market reaction to the negative environmental
publicity received by firms which feature in the Council of Economic Priorities (CEP)
reports in the US. Consistent with their expectations, they did find a negative
abnormal return for these firms on day t-1 and t-2 of the event date t. Lorraine et al.
(2004) focus on the market reaction to publicity about environmental fines and
environmental awards for a sample of 32 such events. They find that while the
126
market ignores good news, it does react to news about fines particularly to relatively
high fines, for up to one week post release of the news. Along similar lines,
Freedman and Patten (2004) who examine the reaction of the market to revisions in
the Clean Air Act in 1989 in US, find that companies which disclosed higher levels of
size-adjusted toxic releases into the air suffered more negative market reactions
than companies with better performance. However, they also find that this effect is
mitigated for firms which made larger financial report environmental disclosures. In
sum while prior evidence using event type methodology, documents a largely
negative stock market reaction to specific disclosure items, there is some early
evidence which suggests that this impact is reduced for firms which make higher and
detailed environmental disclosures in their annual reports (Freedman and Patten,
2004).
More recent work using comprehensive and objective measures of a firms

environmental and social disclosures is more in line with the predictions of the
voluntary disclosure theory and the arguments that better and higher quality
disclosures should help reduce information asymmetry between the firm and its
investors. For instance, Cormier et al. (2011) use measures of environmental and
social disclosures which are classified into hard and soft disclosure items along the
lines of Clarkson et al. (2008). They then develop disclosure ratings based on a
system which assigns higher weight to hard quantitative items. Using these
disclosure ratings, they find evidence that these disclosures help reduce the
information asymmetry between the firm and its investors, as measured by the firms
share price volatility and its bid-ask spread. They also find evidence that social and
environmental disclosures reinforce each other, even substituting each other in
reducing this information asymmetry. Yet, it is important to note that social
disclosures, to date have received relatively scant attention in this literature.
While the capital market implications of environmental disclosures have received

considerable attention, the corresponding work on social disclosures is relatively rare
(some notable exceptions being Cormier et al., 2009; Cormier et al., 2011;
Freedman and Stagliano, 1991). While all of these studies find that markets do react
to social disclosures, the evidence is mixed. Freedman and Stagliano (1991) find a
negative reaction of the market to disclosures related to pollution abatement costs
for health and safety reasons in the cotton industry in US in 1981. Cormier et al.
127
(2009) find that while social disclosures help reduce the information asymmetry
between the firm and its investors, they find no such link with the firms market value
as measured by its Tobins Q. Similar role in reducing information asymmetry is
found by Cormier et al. (2011). It is important to note here that all of these studies
find the market to react mainly to hard quantitative disclosures.
In line with the markets expectations, increasingly, firms are making objective and
hard social disclosures which convey important information about how well the firm is
addressing the expectations of its key stakeholders particularly its employees. A
strong reputation in the social arena, as reflected by higher and better quality social
disclosures, can help a firm attract and retain quality employees (Cormier et al.,
2011), enhance employee morale and hence productivity (Siegel, 2009), and help
reduce the distributional conflicts with these key stakeholders (Heal, 2005). Hence,
reporting responsible social behaviour can help reduce the perceived social risks of
the firm, with associated positive link with its market value. Social (and
environmental) risks if not managed appropriately have the potential to cause severe
damage to the firms reputation; some well-known examples being those of Nike and
Walmart (Heal, 2005) and that of the Bhopal disaster which research shows to have
led to a major shift in the concerned firms disclosure policies (Deegan, 2004).
Based on the preceding arguments, this chapter extends the analysis of Cormier et
al. (2011) by analysing the impact of environmental and social disclosures on firm
value. If as Cormier et al. (2011) find, environmental and social disclosures, reduce
information asymmetry and hence perceived environmental and social risk, this
should be reflected in higher valuation of firms making higher and better quality
disclosures. Accordingly, it can be hypothesised in alternative form as follow:
H1: Ceteris paribus, firms with higher environmental and/or social disclosure
scores tend to have higher market values.
5.2.2 Social disclosure and employee productivity

As mentioned earlier, this chapter also tests the link between social (environmental)
disclosure and social (environmental) performance measured by employee
productivity (carbon eco-efficiency). First, as discussed above, it can be argued that
by making higher social disclosure, firm would increase its trustworthiness among its
key stakeholders particularly employees which in turn would be reflected in higher
128
employee productivity (Siegel, 2009). Furthermore, as the social disclosure score
developed by Bloomberg mostly captures objective measures of social performance;
it can be argued that higher social disclosure can reflect a firms superior social
performance in relation to employee productivity.
Prior studies provide some theoretical arguments of a positive link between social
disclosure and employee productivity. According to Perrini et al. (2009),
CSR contributes to the bottom line via its favourable influence on a firms
relationships with its relevant stakeholders. Higher and better CSR
disclosures can increase the trustworthiness of a firm and strengthen the
relationships with stakeholders (e.g., increased employee satisfaction),
which can decrease transaction costs and so lead to financial gain (e.g.,
decreased employee turnover, more eager talent pool, and strike
avoidance) (p.9).
Heal (2005) states a comprehensive list of the benefits that commentators have
linked to CSR programs, including risk mitigation, waste reduction, improvement of
relations with regulators, cost of capital reduction and improvement of human
relations and increase of employee productivity. Furthermore, based on stakeholder
analysis, Waddock and Graves (1997) propose that a tension exists between a firm's
explicit costs (e.g., payments to bondholders) and its implicit costs to other
stakeholders (e.g., product quality costs, environmental costs). They indicate a firm
that attempts to lower its implicit costs by socially irresponsible actions will incur
higher explicit costs, resulting in competitive disadvantage. However, for instance, an
enlightened employee relations policy may have a very low cost, but can lead to
substantial gains in morale and productivity, actually yielding a competitive
advantage in comparison to less responsible firms. In addition, from an
economic/strategic perspective on green management practices, Siegel (2009)
argues that firms can use environmental and social related tactics to achieve their
strategic goals such as increase of productivity and share price etc. Therefore, it can
be hypothesized that;
H2: Ceteris paribus, firms with higher social disclosure scores tend to have
higher employee productivity.
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5.2.3 Environmental disclosure and carbon eco-efficiency
Prior literature examining the link between environmental disclosure and
environmental performance provides mixed results. From economic based
disclosure theory, Clarkson et al. (2008 and 2011) find a positive relation. From
socio-political based disclosure theory (e.g., stakeholder theory or legitimacy theory),
Brammer and Pavelin (2006 and 2008) find a negative association between the
quality of environmental disclosure and environmental performance measured as the
amount of environmental fine (i.e., the ratio of aggregated level of fines incurred for
environmental transgressions over 4 years period to firms total assets).
Furthermore, Patten (2002a) uses legitimacy theory but a different measure of
environmental performance measurement (i.e., Toxics Release Inventory (TRI) data,
normalized by sales) to proxy for environmental performance. Using a sample of 131
US firms from 24 different industries, and a modified Wiseman index measure and
line count of environmental disclosures in 1990 annual reports, Patten finds that
TRI/sales are positively linked with both measures of environmental disclosures,
suggesting a negative relation between a firms environmental performance and
environmental disclosures.
However, Clarksons et al. (2008) adapt previous research and use similar
environmental performance measurements (i.e., the ratio of total toxic waste treated,
recycled or processed to total toxic waste generated, and the ratio of TRI to firm
sales). Environmental disclosure score is based on an environmental disclosure
Index developed from GRI guidelines. Consistent with economic based disclosure
theory, they find a positive relationship between environmental disclosure and
environmental performance. The proxies for environmental performance of Clarkson
et al. (2008) seem to be more appropriate, as they are the actual pollution discharge
data published by local Environmental Protection Agency (argued by Clarkson et al.,
2008). In this chapter, carbon eco-efficiency (i.e., carbon intensity) is measured in
the similar way as Clarkson et al. (2008), that is, the ratio of carbon emission (Scope
1 and Scope 2) to total sales. It can be argued that firms with higher environmental
disclosure scores would be better environmental performers, in other words, would
tend to have better eco-efficiency (i.e., lower carbon intensity). Thus consistent with
economics based disclosure theory and Clarkson et al.s (2008) findings, it can be
hypothesized that,
130
H3: Ceteris paribus, firms with higher environmental disclosure scores tend to
have lower carbon intensity.
5.3 Data, sample and methodology
5.3.1 Sample and data

In this study, the same dataset as used in the analysis in Chapter 4 is used (i.e., a
pooled cross-section and time series dataset). The sample consists of FTSE 350
index companies covering 2005-2009 excluding financial institutions. Based on the
availability of environmental and social disclosure data, the final sample consists of
629 firm-year observations. FTSE/DJ single-digit industry classification benchmark
(ICB) is adopted, thus there are 9 industry classifications in the sample. The sample
represents a wide range of industries over five years. As mentioned in Chapter 4,
environmental and social disclosure scores are obtained from Bloomberg. Some new
variables are included in this study such as market value Q ratio, employee
productivity, carbon intensity measures and analyst coverage. Accounting data is
from Worldscope and financial data is from Datastream. Analyst coverage is
collected from IBES. It is worth pointing that firms carbon emission data is collected
from the Carbon Disclosure Project website and published reports. Due to data
availability issue, only year 2008 and 2009 emission data is available for the sample
companies.
5.3.2 Models tested and variables

To test H1, that is the link between a firms market value (dependent variable) and its
ES/E/S disclosure score (independent variables), the OLS regression model is
specified as follows;
Market valuei,t = 0 + 1ES/E/S Scorei,t + 2Sizei,t + 3ROAi,t +

4Leveragei,t + 5Financial activitiesi,t + 6Strategic holdingsi,t +
7Analyst coveragei,t + [Industry Dummies] + [Year Dummies] + i,t
(5-1)
In Equation (5-1), the dependent variable is market value measured by Tobins Q. It
is argued by Weir et al. (2002) that Q is a proxy for how closely shareholder and
manager interests have been aligned. They state higher the value of Q, the more
effective the governance mechanisms and the better the markets perception of the
companys performance. Tobins Q is measured as the ratio of total assets (02999)
131
plus market value of equity (MV) minus book value of equity (03501) to total assets
(02999). The independent variable is ES/E/S disclosure score. The expected sign
between the dependent variable and independent variable is positive. G score is not
included in this analysis, as governance-market performance link is already widely
tested (e.g., Brown and Caylor, 2004; Gompers et al., 2003) and the relationship is
considered to be endogenous (Adams et al., 2010; Gompers et al., 2003; Agrawal
and Knoeber, 1996).
Based on prior evidence, I control for firm size measured as log of sales (negative,
see Lo and Sheu, 2007 and Weir et al., 2002), ROA (positive, see Adams and
Mehran, 2005; Clarkson et al., 2011 and Guenster et al., 2011), leverage (negative,
see Weir et al., 2002), financial activities (given lack of prior empirical evidence, no
directional predictions are made in this regard), strategic shareholdings (negative,
see Agrawal and Knoeber, 1996) and analyst coverage (positive, see Chung and Jo,
1996). Chung and Jo (1996) find that analyst coverage (number of analysts issuing
earnings forecasts for the firm) as an effective monitoring device reduces agency
costs and increases the firm value measured as Tobins Q. Industry and time fixed
effects are controlled in Equation (5-1). See Appendix 3 for definition and
measurement for each control variable.
To test H2 and H3, accordingly the OLS regression models are developed as follows;
Employee Productivityi,t = 0 + 1S Scorei,t-1 + 2Gi,t + 3Sizei,t + 4ROSi,t +

5Leveragei,t + 6Capexi,t + [Industry Dummies] + i,t (5-2)
Carbon Intensityi,t = 0 + 1E Scorei,t-1 + 2Gi,t + 3Sizei,t + 4ROSi,t +
5Leveragei,t + 6Capexi,t + [Industry Dummies] + i,t (5-3)
In equation (5-2), the dependent variable is employee productivity which is measured
as the natural logarithm of sales per employee ratio (as also used by Huselid, 1995;
Huselid et al., 1997; Hillier et al., 2007). It is worth mentioning that there are different
ways of measuring employee productivity such as survey based employee
productivity measurement. However, as argued by Huselid (1995),
The logarithm of sales per employee is a widely used measure of

organizational productivity and was adopted to enhance comparability
with prior work. The primary advantages of this measure are that it
provides a single index that can be used to compare firms productivity as
well as to estimate the dollar value of returns for investments in High
Performance Work Practices (p.651).
132
Further, as reviewed by Ho (2005), the variable sales per employee has been used
in past literature (Buckley et al., 1988; Bhagat and Black, 1999). Thus in this study,
the logarithm of sales per employee ratio is used to measure employee productivity.
The independent variable is the lagged S score. The reason to include lagged S
variable is that past investments in social arena are likely to manifest in
improvements in performance in the future.
A number of variables are controlled in equation (5-2) including stakeholder sensitive

governance, firm size, operating profitability, leverage and capital expenditure15. It
can be argued that a firm with stakeholder sensitive governance tends to care more
about its employees, which can affect employee morale and hence increase
employee productivity. Huselid (1995) finds a positive and significant link between
employee motivation and productivity. Thus a positive relation is predicted between
stakeholder governance and employee productivity. Huselid (1995) investigates the
impact of human resource management practices on turnover, productivity and
corporate financial performance. In the productivity regression model, consistent with
Huselid (1995)s findings, I also control for firm size measured as logarithm of total
employee number (negative) and capital intensity (positive). Huselid (1995) also
argues that productivity is not synonymous with profitability, however; a firm can go
bankrupt maximizing sales per employee while ignoring current costs (pp.651-652).
Thus a negative relation is predicted between profitability and employee productivity.
It can also be argued that firms with higher leverage tend to have less money
available to invest in employee related benefits and welfare (e.g., costs related to
employee training and development, health and safety issues), which may negatively
affect employee morale and productivity. Hence, a negative association is expected
between leverage and employee productivity. Industry dummies are included
(Delmas and Pekovic, 2012).
In equation (5-3), the dependent variable is carbon intensity which is measured as

the ratio of carbon emission (scope 1 and scope 2) to sales (as also used by
15
Capital expenditure is measured as the ratio of capital expenditures (04601) to total sales (01001). It represents the
funds used to acquire fixed assets other than those associated with acquisitions, including but is not restricted to additions
to property, plant and equipment and investment in machinery and equipment. This ratio also proxies a companys asset
newness to some extent, since more funds used to acquire additional property, plant and equipment imply that the newer
assets are used in the company.
133
Hoffmann and Busch 16 , 2008; Busch and Hoffmann, 2011). The independent
variable is the lagged E score. Similarly, I control for stakeholder sensitive
governance, firm size, operating profitability, leverage and capital expenditure.
It can be argued that firms with stakeholder sensitive governance tend to care more
about its stakeholders including its environmental performance. Hence, a positive
link is predicted between G and environmental performance. Clarkson et al. (2011)
use similar measure to capture environmental performance. Based on Clarkson et
al.s findings, firm size is negatively linked with environmental performance. The
association between leverage (capital expenditure) and environmental performance
is found to be negative (positive) but insignificant. Profitability measured as ROA is
positively related to environmental performance. Clarkson et al. (2011) argue that
firms with sufficient financial resources measured as profitability (ROA), liquidity
(operating cash flow) and leverage, tend to have better environmental performance.
However, it can be argued that firms with more sales related profitability (i.e., ROS)
have higher environmental impact (i.e., emit more carbon). Thus the link between
ROS and environmental performance is expected to be negative. It can also be
argued that the more money spent on newer equipment and technologies in
production (i.e., capital expenditure), the lower would be the environmental impact of
the firm. In other words, firms with newer, cleaner technologies are likely to have a
superior environmental performance. Hence, a positive relation is expected between
capital expenditure and environmental performance. In equation (5-3) environmental
performance is measured as carbon intensity ratio (i.e., higher carbon intensity,
worse environmental performance or less carbon eco-efficient). Accordingly, the
predicted sign (i.e., inversed relations) with respect to each control variable is stated
as follows: G (negative), firm size (positive), ROS (negative), leverage (positive) and
capital expenditure (negative). Industry dummies are also included in equation (5-3).
Petersen (2009) two-way standard errors clustering (firm and year) approach is used
to test H2 and H3.
16
Carbon intensity relates to a companys physical carbon performance and describes the extent to which its business
activities are based on carbon usage for a defined scope and fiscal year (Hoffmann and Busch, 2008 p.509).
134
5.4 Results

Table 5.1 provides the descriptive statistics for all variables used in the analyses.
Variable Observation Median Mean S.D. Min Max

Q ratio 627 1.55 1.88 1.35 0.38 18.93
Productivity 621 5.03 5.17 0.96 2.18 9.65
Carbon
intensity 169 0.07 0.44 1.42 0 17.3
E 619 19.51 22.02 13.53 2.33 63.57
S 627 28.07 32.10 12.87 4.69 70.18
G 629 51.79 51.56 8.50 5.36 76.79
Et-1 381 20.93 22.72 13.76 2.33 62.79
St-1 388 28.07 32.84 13.16 4.69 70.18
ROA 627 0.11 0.13 0.14 -0.46 1.31
ROS 622 0.12 0.15 0.27 -1.28 5.42
Size_emp 622 9.34 9.29 1.62 2.57 13.30
Size_sales 622 14.38 14.47 1.54 10.31 19.56
Leverage 627 0.23 0.25 0.19 0 1.33
Capex 622 0.04 0.09 0.20 0 3.36
Fin_acts 627 0.002 0.02 0.07 -0.01 0.85
Str_holds 629 0.16 0.20 0.17 0 0.83
Analyst
coverage 626 13 13.76 6.05 1 35
Notes: Q ratio is defined as total assets plus market value of equity minus book value of equity divided by
total assets; Productivity refers to employee productivity and is measured as natural logarithm of sales per
employee ratio; Carbon intensity is measured as the ratio of carbon emission (scope 1 and scope 2) to
sales; E denotes environmental disclosure; S denotes social disclosure; G is defined as stakeholder
sensitive governance disclosure; Et-1 and St-1 refer to one year lagged E and S score respectively; ROA
is defined as the ratio of earnings before interest and taxes to total assets at the beginning of the year;
ROS denotes the ratio of earnings before interest and taxes to net sales; Size_emp denotes firm size
measured as natural logarithm of employee number; Size_sales denotes firm size measured as natural
logarithm of total sales; Leverage is measured as the ratio of total debt to total assets; Capex is defined as
the ratio of capital expenditures to net sales; Fin_acts denotes financial activities and is measured as the
ratio of net proceeds from sale/issue of common and/or preferred stock during the year to total assets at
the beginning of the year; Str_holds refers to strategic shareholdings and is measured as the percentage
of total shares in issue held strategically and not available to ordinary shareholders (holdings of 5% or
more are counted as strategic); Analyst coverage denotes number of analysts following firms earning.
As Table 5.1 shows the mean values of Q ratio is 1.88. The average employee
productivity is 5.17 after taking logarithm (i.e., equivalent to 175037 GBP per
employee) and the average carbon intensity is 0.44 (equivalent to 440 tonnes of
carbon emission per 1 GBP of sales). As many variables are described in the
descriptive statistics section in Chapter 4, they are not discussed here. The mean
value of ROA is 13%. The average firm size measured as natural logarithm of sales
135
is 14.47, which approximates 1.9 billion GBP of sales. On average, there are 14
analysts issuing earnings forecasts for a firm. Most median values are closed to
mean values, which indicates that the sample is not affected by outliers and is
normally distributed 17 . A plot of E/S/ES disclosure distribution is attached in
Appendix 4. Of note, the number of observations for each variable varies slightly
based on the availability of data for the variable18.
The pair-wise correlation matrices for testing H1, H2 and H3 are displayed in Table
5.2a, 5.2b and 5.2c respectively. As Table 5.2a, 5.2b and 5.2c shown,
multicollinearity is not likely to be an issue for testing H1, H2 and H3.
Table 5.2 a Pair-wise correlation matrix for testing H1
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
1 ES 1.00
2 E 0.91*** 1.00
3 S 0.90*** 0.64*** 1.00
4 Q ratio -0.06 -0.09** -0.01 1.00
5 ROA -0.05 -0.04 -0.04 0.53*** 1.00
6 Size_sales 0.61*** 0.56*** 0.54*** -0.33*** -0.16*** 1.00
7 Leverage 0.00 0.01 -0.01 -0.08* -0.03 0.04 1.00
8 Fin_acts 0.01 0.02 0.00 0.17*** -0.01 -0.11*** -0.08* 1.00
9 Str_holds -0.26*** -0.28*** -0.18*** 0.06 0.10*** -0.30*** -0.08** -0.09** 1.00
10 Analyst 0.49*** 0.44*** 0.44*** -0.04 -0.02 0.62*** 0.11*** -0.05 -0.27*** 1.00
coverage
Notes: ES denotes the sum of E and S scores; E denotes environmental disclosure; S denotes social disclosure;
Q ratio is defined as total assets plus market value of equity minus book value of equity divided by total assets;
ROA is defined as the ratio of earnings before interest and taxes to total assets at the beginning of the year;
Size_sales denotes firm size measured as natural logarithm of total sales; Leverage is measured as the ratio of
total debt to total assets; Fin_acts denotes financial activities and is measured as the ratio of net proceeds from
sale/issue of common and/or preferred stock during the year to total assets at the beginning of the year;
Str_holds refers to strategic shareholdings and is measured as the percentage of total shares in issue held
strategically and not available to ordinary shareholders (holdings of 5% or more are counted as strategic);
Analyst coverage denotes number of analysts following firms earning. *, **, *** indicates significance at
the .10, .05, .01 levels respectively.
17
It is worth pointing out that the mean value of carbon intensity is 0.44, while the median value is 0.07. This indicates that
the mass of my data is concentrated on the right hand side of the frequency curve chart (i.e., the distribution is skewed).
Because there is a large value (checked and it is not an outlier) of carbon intensity (carbon emission to sales ratio =17.3)
and some 0 values, which may affect the mean value. To cope with this, I take natural logarithm of carbon intensity
variable plus one (to maintain the same number of observations). The skewness decreases from 10.17 to 2.98. The mean
value of the new variable is 0.25. Then I rerun the regression with respect to carbon intensity using Petersen two-way
clustering approach, which provides similar results.
18
The descriptive statistics provided on Table 5.1 are appropriate, as the number of each variable is used in different
regressions. For example, the sample size of regression model explaining Q ratio or productivity is more than 600, and the
results with non-missing values are similar to the original ones and will be explained further under the results of Table 5.3.
Although the number of carbon intensity is 169, it is only used in the carbon intensity regression and is not affected by
other variables.
136
Table 5.2b: Pair-wise correlation matrix for testing H2
Variable (1) (2) (3) (4) (5) (6) (7)
1 Productivity 1.00
2 St-1 0.24*** 1.00
3 G 0.19*** 0.56*** 1.00
4 Size_emp -0.38*** 0.41*** 0.28*** 1.00
5 ROS 0.13*** 0.02 0.05 -0.21*** 1.00
6 Leverage -0.14*** 0.01 -0.12*** 0.12*** 0.01 1.00
7 Capex 0.15*** 0.04 0.06 -0.27*** 0.28*** 0.06 1.00
Notes: Productivity refers to employee productivity and is measured as natural logarithm of sales per employee
ratio; St-1 refers to one year lagged S score; G is defined as stakeholder sensitive governance disclosure;
Size_emp denotes firm size measured as natural logarithm of employee number; ROS denotes the ratio of
earnings before interest and taxes to net sales; Leverage is measured as the ratio of total debt to total assets;
Capex is defined as the ratio of capital expenditures to net sales. *, **, *** indicates significance at
the .10, .05, .01 levels respectively.
Table 5.2c: Pair-wise correlation matrix for testing H3

Variable (1) (2) (3) (4) (5) (6) (7)
1 Carbon 1.00
intensity
2 Et-1 0.01 1.00
3 G 0.07 0.53*** 1.00
4 Size_emp -0.06 0.41*** 0.30*** 1.00
5 ROS 0.12 0.00 0.02 -0.19*** 1.00
6 Leverage 0.07 0.03 -0.10* 0.16*** 0.03 1.00
7 Capex 0.05 0.14** 0.08 -0.26*** 0.25*** 0.03 1.00
Notes: Carbon intensity is measured as the ratio of carbon emission (scope 1 and scope 2) to sales; Et-1 refers
to one year lagged E score; G is defined as stakeholder sensitive governance disclosure; Size_emp denotes firm
size measured as natural logarithm of employee number; ROS denotes the ratio of earnings before interest and
taxes to net sales; Leverage is measured as the ratio of total debt to total assets; Capex is defined as the ratio of
capital expenditures to net sales. *, **, *** indicates significance at the .10, .05, .01 levels respectively.
5.4.2 Regression analysis

Table 5.3 displays the results of testing H1 (i.e., the link between ES/E/S score and
market value).
137
Table 5.3: OLS regressions explaining market value (Equation 5-1)
Q ratio (Dependent variable)
Predicted
sign ES E S
Intercept 5.59*** 5.53*** 5.79***
(8.16) (8.43) (9.50)
ES + 0.01**
(2.04)
E + 0.002
(0.50)
S + 0.01***
(3.03)
Size_sales - -0.31*** -0.29*** -0.32***
(-7.33) (-7.20) (-7.73)
ROA + 5.01*** 4.99*** 5.05***
(3.72) (3.67) (3.89)
Leverage - -0.18 -0.20 -0.21
(-0.43) (-0.47) (-0.51)
Fin_acts +/- 1.44** 1.45** 1.49**
(2.27) (2.31) (2.27)
Str_holds - -0.10 -0.11 -0.18
(-0.30) (-0.33) (-0.55)
Analyst + 0.02** 0.03*** 0.02*
coverage (2.09) (2.71) (1.70)
Industry Yes Yes Yes
effect
Year effect Yes Yes Yes
N 607 609 617
Clusters 231 232 233
R2 51.22% 50.62% 52.15%
F-test 12.26*** 11.99*** 13.11***
Notes: Q ratio is defined as total assets plus market value of equity minus book value of equity divided by total
assets; ES denotes the sum of E and S scores; E denotes environmental disclosure; S denotes social disclosure;
ROA is defined as the ratio of earnings before interest and taxes to total assets at the beginning of the year;
Size_sales denotes firm size measured as natural logarithm of total sales; Leverage is measured as the ratio of
total debt to total assets; Fin_acts denotes financial activities and is measured as the ratio of net proceeds from
sale/issue of common and/or preferred stock during the year to total assets at the beginning of the year;
Str_holds refers to strategic shareholdings and is measured as the percentage of total shares in issue held
strategically and not available to ordinary shareholders (holdings of 5% or more are counted as strategic);
Analyst coverage denotes number of analysts following firms earning; T-statistics are in parentheses. *, **, ***
indicates significance at the .10, .05, .01 levels respectively. Standard errors are computed with procedure
allowing for clustering across observations corresponding to the same firms for different years.
As table 5.3 shown (results with respect to Equation 5-1), there is a positive and
significant association between ES disclosure and a firms Q ratio. This result
suggests that firms which provide higher and better overall E and S information, help
reduce information asymmetry between the firm and the investors thus reducing the
perceived risk in these areas (Cormier et al., 2011) which is then reflected in higher
market values for such firms. At a disaggregated level, similar results are generated
for social disclosure, though not for E disclosures. In some ways, this finding is quite
surprising, given the preponderance in literature on capital market implications of
138
environmental performance and environmental disclosures. The findings suggest
that while the academia has focused more on environmental issues in CSR research,
for investors it is the social performance and its subsequent disclosure that matters
more. It seems that investors tend to place a relatively higher value on how firms
address their social responsibilities particularly towards their employees. Anecdotal
evidence indicates that prominent distributional conflicts between business and its
stakeholders have been related to labour issues; well-known examples being Nike
and Wal-Mart (see Heal, 2005 for further details). It appears that investors have now
become sensitised to a businesss key stakeholder particularly labour management
practices and value higher a firm which better communicates its employee related
practices.
The relations with respect to control variables in Table 5.3 are as expected and
consistent with existing literature. There is a negative and significant relationship
between firm size and Q ratio (Lo and Sheu, 2007 and Weir et al., 2002). ROA is
positively and significantly related to Q ratio (Clarkson et al., 2011; Guenster et al.,
2011). Financial activities variable is found to be positively and significantly linked
with Q ratio, implying that firms which raise funds by issuing/selling stocks/bonds
tend to have higher market values. Lang and Lundholm (1996) find that more
disclosure leads to more analysts following. Consistent with Chung and Jos (1996)
finding that analyst coverage is an effective monitoring device, which reduces
agency costs and increases the value of a firm, it is found that the level of analyst
coverage is positively and significantly related to a firms Q ratio.
It is worth noting that I also check the impact of missing observations on the results.
First, I check the number of observations left with non-missing values. Second, I run
a summary statistics and compare with the original descriptive table. Finally, re-run
all regressions on Table 5.3 with non-missing values, and compare the results. The
results show that there are 607 observations left with non-missing values. The
summary statistics (e.g., mean values) are very closed to the original table. All
results with non-missing values are similar to the results on Table 5.3. Therefore, the
results are not affected by any missing values, and the descriptive statistics provided
on Table 5.1 are reliable to carry out the above analysis.
139
Table 5.4 presents the results with respect to Equation 5-2 (i.e., H2: the association
between S score and employee productivity) and Equation 5-3 (i.e., H3: the relation
between E score and environmental eco-efficiency).
Table 5.4 OLS regressions explaining carbon intensity and employee

productivity
Dependent variable
Predicted Carbon Predicted Productivity(Eq5-3)
sign intensity(Eq5-4) sign
Et-1 St-1
Intercept 1.01 6.65***
(0.69) (13.95)
Et-1 - -0.01*
(-1.68)
St-1 + 0.01**
(2.28)
G - -0.01 + 0.02***
(-0.42) (3.72)
Size_emp + -0.02 - -0.28***
(-0.42) (-8.16)
ROS + 0.45*** - -0.23***
(3.05) (-2.66)
Leverage + -0.17 - -0.18
(-0.22) (-0.88)
Capex - -0.04 + -0.69***
(-0.20) (-3.92)
Industry effect Yes Yes
N 148 384
2
R 18.08% 50.90%
F-test 6.21*** 25.33***
Notes: Productivity refers to employee productivity and is measured as natural logarithm of
sales per employee ratio; Carbon intensity is measured as the ratio of carbon emission
(scope 1 and scope 2) to sales; Et-1 and St-1 refer to one year lagged E and S score
respectively; G is defined as stakeholder sensitive governance disclosure; Size_emp
denotes firm size measured as natural logarithm of employee number; ROS denotes the
ratio of earnings before interest and taxes to net sales; Leverage is measured as the ratio of
total debt to total assets; Capex is defined as the ratio of capital expenditures to net sales.
T-statistics are in parentheses. *, **, *** indicates significance at the .10, .05, .01 levels
respectively. Standard errors are computed using Petersen (2009) two-way clustering (firm
and year) approach.
With respect to the results of employee productivity (Equation 5-2), there is a positive
and significant relation between lagged S score and employee productivity (support
for H2). In other words, it implies that more employee related social disclosure (S
score developed by Bloomberg is more employee related) increases a firms
trustworthiness among its key stakeholders particularly employees, which in turn is
reflected in higher employee productivity. This finding is also consistent with
economics based disclosure theory that more social disclosure in previous year
reflects better social performance (captured by higher employee productivity) in the
current year.
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It is important to note that there is a positive and significant relation between
governance and employee productivity, which implies that stakeholder sensitive
governance matters for employee productivity. In other words, firms with stakeholder
sensitive governance tend to care more about their employees (a key stakeholder).
In turn, these firms can benefit from higher employee productivity. This finding is
consistent with Heal (2005) and Waddock and Graves (1997) arguments that CSR
programme can improve employee productivity, especially an enlightened employee
relations policy may have a very low cost, but can lead to substantial gains in
employee morale and productivity, hence yield a competitive advantage in
comparison to less socially responsible firms. It is found that firm size is negatively
and significantly linked with employee productivity, which is as found by Huselid
(1995) as well as by Delmas and Pekovic (2012). ROS is negatively and significantly
related to employee productivity, which is consistent with Huselids (1995) argument
that employee productivity is not synonymous with profitability, as well as consistent
with Waddock and Gravess (1997) argument that social responsible firms may have
higher implicit costs to other stakeholders such as employees, hence leads to lower
profitability (but higher employee productivity). Huselid (1995) finds capital intensity
(measured by the ratio of gross property, plant, and equipment over total employee
number) is positively linked with productivity, while R&D expenditures (measured by
the logarithm of the ratio of R&D expenditures to sales) are negatively associated
with productivity. However, a negative link between capital expenditure and
employee productivity is found. This finding may result from the denominator of
capital expenditure variable (measured as the ratio of capital expenses to total sales
instead of total employee number).
Regarding the results of carbon intensity (Equation 5-3), there is a negative and
significant relation between lagged E score and carbon intensity (support of H3).
This finding is consistent with economics based disclosure theory that more
environmental disclosure in prior year can be a reflection of better environmental
performance in current year. This result implies that firms providing more
environmental related information in prior year are willing to show their commitment
to be environmentally responsible by reducing their carbon emission in current year.
Consistent with my expectation, ROS is positively and significantly linked with carbon
intensity, which suggests that firms with higher sales tend to have higher
141
environmental impact (i.e., they emit more). It appears that carbon eco-efficiency is
affected by industry. From the results (not reported), it is can be seen that firms in Oil
& Gas and Basic Materials industries emit more carbon (Scope 1 and Scope 2)
compared to other industries. Thus it is not surprising that prior studies tend to focus
on highly polluting firms, when examining environmental responsibility (Clarkson et
al., 2008 and 2011).

To sum up, this study finds that higher overall environmental and social disclosures,
but particularly social disclosures matter to investors. Investors appear to be placing
a higher value on the firm seen to be behaving in a socially responsible manner.
They can evaluate how well the firm is currently managing its environmental and
social risks, and value such firm accordingly. More responsible behaviour in the
social arena as reflected by its subsequent disclosure, helps mitigate the information
asymmetry and hence the perceived social risks of the firm. Therefore, investors
place higher values on such firms. Since the S score mostly covers aspects related
to employee and human relations, this finding implies that while firms seem to care
more about the environment (perhaps in anticipation of impending regulation),
investors seem to value more how the firms treat their key stakeholders particularly
the human resources. Furthermore, these results are consistent with the predictions
of the voluntary disclosure theory (Verrecchia, 1983) and imply that despite being
costs, firms are willing to provide relevant information voluntarily to the market, if the
expected benefits of such disclosures are higher than the associated costs.
The findings of testing the link between social (environmental) disclosure and social
(environmental) performance are consistent with the economics based disclosure
theory. In other words, more social (environmental) disclosure in prior year reflects
better social (environmental) performance captured by higher employee productivity
(more carbon eco-efficiency) in the current year. Furthermore, more social disclosure
helps build trust among a firms key stakeholders particularly employees, which in
turn would be reflected in higher employee productivity. This is also consistent with
Siegels (2009) argument that firms tend to use environmental or social related
tactics (e.g., environmental or social disclosures) to align the interests between their
shareholders and stakeholders. Thus firms can benefit from providing more
142
environmental or social disclosure in prior year. These findings are also consistent
with stakeholder theory implying that firms with more stakeholder sensitivity care
more about their employee related benefits or wellbeing, which could affect
employee morale and productivity. In short, prior environmental and social
disclosures can reflect a firms current environmental (carbon eco-efficiency or less
direct costs related to pollution/carbon emission trading) or social performance
(employee productivity).
Prior studies tend to focus more on environmental aspect; this study adds
significance to social disclosure. In other words, social disclosure plays as important
role as environmental disclosure (perhaps more important). The preceding chapter
provides some evidence that corporate governance (captured by the G variable)
matters for a firms environmental and social performance. In the next chapter, I will
examine in detail the links between board attributes, CSR strategy and firms
environmental and social performance.
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Chapter 6: Board attributes, CSR strategy and firms environmental
and social performance
6.1 Introduction
As mentioned in Chapter 2, the Companies Act 2006 sec. 172 stated that a director
should consider wider range of stakeholders (e.g., employees, environment,
customers, community and suppliers) to promote long-term business success. On
the one hand, Kim and Nofsinger (2007) argue that from the stakeholder perspective,
corporate governance is the mechanism that ensures corporations take responsibility
for directing their activities in a manner fair to all stakeholders. On the other hand,
from the broader conception of corporate governance (CG), Jamali et al. (2008) find
that there is a clear overlap between CG and the stakeholder conception of CSR.
Both CG and CSR call on companies to assume their fiduciary and moral
responsibilities towards stakeholders. This act of accountability is crucial for a
business to gain and retain the trust of its financial investors and other stakeholders
(Page, 2005). Indeed, Jamali et al. (2008) conclude that there is a two-way
relationship. CG and CSR should not be considered and sustained independently.
CG is not entirely effective without a sustainable CSR drive, because a company has
to meet various stakeholders needs in order to create value for its shareholders.
Recognizing the important role that boards play in addressing wider stakeholder
responsibility, a few prior studies have addressed the effects of corporate
governance (especially board attributes) on CSR (Johnson and Greening, 1999;
Mallin and Michelon, 2011; Post et al., 2011). Recently, Mallin and Michelon (2011)
investigate the relation between various board attributes and a firms CSR
performance, and find that board attributes such as board size, independence and
diversity significantly affect a firms CSR performance. Hence, from a strategic
perspective, developing and implementing the appropriate CSR vision and strategy
of firms is the function of corporate board (Ho, 2005; Mackenzie, 2007).
As shown in Figure 3.2, to date, prior studies drawing on the management

perspective, particularly the resource-based view of the firm, have studied the link
between a firms managerial environmental strategy (though assumed to be
unobserved or measured indirectly) and its environmental performance (e.g., Al-
Tuwaijri et al., 2004; Clarkson et al., 2011); or from a corporate governance
144
perspective (e.g., resource dependency theory) have studied the link between a
firms board attributes and corporate social performance (Johnson and Greening,
1999; Mallin and Michelon, 2011). However, prior literature on CSR from both
management and corporate governance perspectives has tended to suffer from
conceptual as well as methodological limitations.
As discussed extensively in Chapter 3 section 3.3.3, studies drawing on the

management literature hypothesise that superior managerial capabilities and
superior CSR strategy translate into superior CSR performance. However, neither of
these two explanatory variables is explicitly accounted for in the research design. As
also discussed extensively in Chapter 3 section 3.3.1 and 3.3.2, studies from the
corporate governance perspective, while acknowledging the strategy setting and
advisory role of the board (e.g., Mallin and Michelon, 2011), neither explicitly
consider the strategic actions of the board in this regard, nor control for the possible
endogeneity of the link between board attributes and CSR performance (as is
implied by Hermalin and Weisbachs 2003 model). Hence, to date, no prior study
takes a more integrated approach and examines the link between a firms board
attributes, its CSR strategy and its environmental and social performance.
In this chapter, using a sample of UK firms included in the FTSE All-Share Index
from 2002 to 2010, I investigate the relations among board attributes, CSR strategy
and firm environmental and social performance. Using an aggregated measure of
CSR strategy and a latent construct capturing board level CSR orientation, I also
examine the possible endogenous link between board attributes, board CSR strategy
and firm environmental and social performance.
This study thus improves on prior literature both conceptually and methodologically.
Drawing upon two largely independent streams of literature in the field of CSR,
namely corporate governance literature and CSR as a competitive strategy literature,
the findings suggest that in order to develop a more complete understanding of firms
CSR performance drivers, it is important to integrate the two streams in such types
of analyses. Methodologically, it incorporates the influences of both board level CSR
orientation and strategy on firms environmental and social performance; explicitly
measures CSR strategy; and uses structural equation modelling technique to test
whether this link is endogenous.
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6.2 Theoretical model and hypotheses development
As reviewed in Section 3.3.4, Hermalin and Weisbach (2003) argue that the board of
directors of a company is an endogenously determined institution. It implies that the
choice of directors on a board would be a within-equilibrium phenomenon
determined by the companys own characteristics including its (CSR related)
strategies and financial/non-financial performance (such as CSR performance).
Hence, adapted from Hermalin and Weisbach (2003) theoretical model, Figure 6.1
displays the adapted theoretical model and relevant hypotheses.
Figure 6.1: The structural equation model on boards of directors
Measurement model:
Board Board diversity Audit Committee

independence Expertise
Board CSR
Orientation
(Endogenous)
Structural model:
CSR strategy
H2
H1
Board CSR H3 Environmental

Orientation H1 and social
(Endogenous) performance
Adapted from Hermalin and Weisbach (2003)
As Figure 6.1 illustrates, the relation between CSR-related board characteristics and
CSR performance is not only likely to be endogenous, but is likely to be mediated by
appropriate CSR strategy such as taking the decisions and actions like putting in
place a CSR committee.
146
While the literature review in sections 3.3.1, 3.3.2 and 3.3.3 respectively makes clear
the direction and nature of the causal links expected between board CSR attributes,
CSR strategy and firm environmental and social performance, it does not clarify how
CSR performance may affect board CSR attributes. In this regard, while consistent
with the empirical and theoretical work of Hermalin and Weisbach (1998, 2003), it
can be argued that performance could also affect board attributes. However, no
prediction is made (either positive or negative) regarding the nature of this relation.
One can argue that if poor CSR performance leads to addition of CSR-conducive
board members (in response to say stakeholder pressure, consistent with legitimacy
theory based arguments), then the link would be negative. For example, appoint
more independent and/or women directors who are able to bring in precious
resources to enhance the organisational legitimacy. If however, it is the case that
superior CSR performers want to further build on this competitive advantage, as
suggested by RBV theory, then they would respond to superior CSR performance,
by further strengthening the board level CSR orientation. In this case, the link would
be positive. Thus it can be an open empirical question.
In addition, drawing upon prior empirical evidence, I use three board characteristics
that have been found to have a significant link with a firms CSR performance
namely: board independence (proportion of outside directors), gender diversity and
audit committee expertise, to capture board level CSR orientation (i.e., a latent
variable). Based on above theoretical model and prior empirical evidence (as
reviewed in Chapter 3 sections 3.3.1, 3.3.2 and section 3.3.3), three hypotheses are
developed as follows:
H1: Board CSR orientation is positively associated with CSR strategy.
H2: CSR strategy is positively associated with a firms environmental and

social performance.
H3: Both a firms environmental performance and social performance are

positively (negatively) associated with board CSR orientation.
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6.3 Variables and models
6.3.1 Endogenous variables

Board CSR orientation
To capture the latent construct, boards CSR orientation, I use three board attributes
as indicators, namely board independence (i.e., proportion of outside director
representation on board); board gender diversity; and financial expertise on audit
committee. Below I discuss the rationale for inclusion of each of these variables.
Board independence: According to Agency theory, to reduce opportunism and

agency costs, boards should consist of a greater proportion of outside directors (i.e.,
be more independent). With a greater proportion of outsiders, a board is likely to be
more independent and has greater monitoring potential (Fama and Jensen, 1983).
Outside directors can monitor the behaviour of managers and intervene when
managers behave opportunistically (Post et al., 2011). For example, inside directors
may tend to be more attentive than outsiders to short-term economic performance
goals, while outsiders may consider that attending to the environmental issue is also
important for the long-term interest of shareholders (Johnson and Greening, 1999).
Moreover, board independence might be important in governing climate change
because independence would be expected to inject new insights and perspectives
related to environmental and social stakeholders, while challenging existing mental
models in decision making that may be focused exclusively on the economic bottom
line (Galbreath, 2010). The 2010 Code section B.1.2 recommends that large UK
listed firms should have at least half of the board composed of independent NEDs.
According to the Code, a director considered to be independent, he/she should have
not previously been an employee of the company (within the last five years); have no
family or business link with the company; do not hold any cross directorship; should
not represent any significant shareholder; should not receive additional remuneration
from the company apart from a directors fee; and should not have been on the
Board for more than nine years.
From a resource dependency theory perspective, Pfeffer and Salancik (1978)

suggest that the selection of a greater number of independent directors signals a
firms intent to pay greater attention to its external environment and legitimacy.
148
According to their resource dependence framework, independent directors attract
valuable resources to a firms viability in terms of establishing external links with
stakeholders and other organisations and enhancing the reputation of the firm.
Furthermore, the presence of independent directors on the board should increase
the boards objectivity and its ability to represent multiple points of view about firms
environment and among stakeholders. Wang and Dewhirst (1992) find outside
directors are likely to have a stakeholder orientation. In addition, Mallin and Michelon
(2011) consider outsider directors to be boundary spanners who can attract valuable
resources to a firm as well as help a firm establish external links with stakeholders
and other organisations. Thus independent directors are more conscious of
stakeholders expectation. Based on the discussed evidence, it can be argued that
the more independent a board, the more CSR oriented it is likely to be. Asset4 the
database used in this study measures board independence by the percentage of
independent board members as reported by a company.
Board diversity: There is a growing societal as well as regulatory pressure (see

Financial Reporting Council, 2011) on companies to become more diverse and
inclusive. According to a study by Sealy and Vinnicombe (2012) women directors
made up 11.2% of executive and 33.8% of non-executive directors on FTSE 350
companies in 2012. In terms of the stakeholder-related values and competencies
that women bring on board, a study by Singh et al. (2006) finds that women are more
likely to possess business as well as community related expertise. Furthermore, a
study by Kramer et al. (2006) finds that the presence of women on boards tends to
broaden the content of boardroom discussion to include the perspectives of multiple
stakeholders. A recent comprehensive literature review of women on corporate
boards also draws the conclusion that most research on the role of women on
boards is focused around their potential role in building fairer and more inclusive
business institutions that reflect the expectations of present generation of
stakeholders (Terjesen et al., 2009). Nielsen and Huse (2010) draw upon theories of
gender differences and group effectiveness to examine the contribution of women on
boards of directors. Their findings suggest that women tend to accept others
positions, support and sooth others and contribute to relational and interpersonal
problems. The Financial Reporting Council (2011) consultation document on gender
diversity also echoes the expectation that women on boards may help companies
149
build better relationship with its key stakeholders like customers and employees.
Hence, it is expected that the greater the proportion of women on board, the higher a
boards CSR orientation. Asset4 measures board diversity as percentage of women
on the board of directors.
Financial expertise on audit committee: The UK Combined Code (2003), consistent

with the recommendations of the Sarbanes Oxley Act (2002) in the US (which is
used by Asset4 for measuring audit committee expertise), suggests that at least
some members of audit committees should have adequate knowledge of finance and
financial matters. Audit committees are responsible for internal control and for
managing both the financial and non-financial risks faced by a firm. As environmental
risks can have significant financial implications in the form of environmental fines as
well as potential cash outlays for pollution control and for investments in
environmentally friendly technologies (Freedman and Patten, 2004), audit
committees with members having financial expertise are likely to be better equipped
for developing policies and strategies that can help avoid and manage these risks. In
this regard, Goodstein and Boeker (1991) state the specific and unique individual
competencies of board directors contribute differently to the board process and
priorities; thus motivate management to adopt specific strategies and actions.
According to resource dependence theory (Hillman and Dalziel, 2003; Pfeffer and
Salancik, 1978), board directors with financial expertise on audit committees can
play an effective service role as advisors, boundary spanners, as well as resource
providers. As advisors and boundary spanners, they can help a firm better assess its
CSR risks and challenges, and help develop an effective strategic response such as
encouraging compliance with GRI guidelines. As resource providers, they can help a
firm develop links with external organisations like external environmental audit
agencies, and encourage a firm to opt for the decision to get an external audit of its
CSR report. Research shows that external audit of CSR report is valued highly by
investors (Lee and Hutchison, 2005). Asset4 measures audit committee expertise as
a dummy variable with a score 1 if a firm has an audit committee with at least three
members, one of whom is considered as a financial expert within the meaning of
Sarbanes-Oxley, and 0 otherwise.
150
CSR Strategy
Relatively little research has specifically identified variables that could capture a
firms strategic stance towards its CSR-related responsibilities. A notable exception
is the study by Galbreath (2010) who uses five categories of the California
Environmental Resources Evaluation System (CERES) to demonstrate a firms
proactive posture towards climate change. Asset4 develops an index for capturing a
firms board level CSR policy and strategy based on measures that are closely
aligned with those used by Galbreath (2010). These variables are: 1) integration by a
firm of its financial and extra-financial reporting; 2) decision to report or otherwise on
the firms CSR-related global activities; 3) existence or otherwise of a board CSR
committee; 4) decision to have an external audit of CSR report; 5) decision to comply
with GRI guidelines. How these variables contribute to an effective CSR strategy is
discussed below.
a) Integration of financial and extra-financial reporting; and b) CSR global activities

reporting: In terms of the relevance for a firms CSR strategy, the above two
variables can be considered to be an attempt on the part of the firm to commit to
providing relevant and timely voluntary disclosure about its extra-financial activities
including environmental and social challenges they face globally. As studies suggest
(e.g., Cormier et al., 2011), such disclosures help reduce information asymmetry
between a firm and its investors; thus build trust and reduce perceived firm risk.
Corporate governance is also intimately concerned with honesty and transparency,

which are increasingly expected of the public both in corporate dealings and
disclosure (Page, 2005). Investor confidence and market efficiency depend on the
disclosure of credible information about a firms financial and extra-financial
performance. OECD 2004 principles propose CG framework to promote transparent
and efficient market and to provide timely and accurate disclosure. It is voluntary
for a firm to provide extra-financial information, for example, openly reporting about
the challenges or opportunities of integrating financial and non-financial issues and
disclosure of global activities in the extra-financial reports. From economic based
voluntary disclosure theory, the more extra-financial reporting (in terms of challenges
and opportunities and global activities) a firm provides, the more inclined it would be
151
towards stakeholder engagement and the better environmental or social performer it
likely to be.
Existence of CSR committee: Having a separate CSR committee not only indicates a
public recognition of the importance of environmental and social responsibilities for
the firm at the top, but also demonstrates the putting in place of human resources
and organisational structures, for providing effective planning and oversight in this
area. According to Mackenzie (2007), the key activities of CSR committees are
discussing issues and risks, setting standards, reviewing implementation and
disclosure, and philanthropy (e.g., reviewing CSR issues, identifying non-financial
risks and monitoring risk management, establishing policies and standards,
monitoring compliance with the performance against companies CSR policies,
reviewing company reporting on CSR, overseeing philanthropic activity, reviewing
companys adoption of external codes and inclusion in CSR indices such as
FTSE4Good, and looking at management implementation plans and targets). Overall,
Mackenzie (2007) states that CSR committees play an important role in assisting the
management in CSR strategy formulation and in reviewing the firms CSR
performance.
External audit of CSR report: The decision to have the CSR report externally audited
demonstrates a further commitment on the part of the firm to building trust with its
stakeholders. The objective of the verification is to provide an opinion to
stakeholders on the accuracy and reliability of selected KPI data presented in the
report (The Go-Ahead Group Plc, Corporate Responsibility Report 2010, p.22).
Furthermore, Cooper and Owen (2007) analyze 12 corporate sustainability reports
and find that assurance providers make specific reference to carrying out their work
in relation to the AA1000 Assurance Standard that has a profound stakeholder
orientation. Research shows that external audit of CSR report is valued highly by
investors. For example, Lee and Hutchison (2005) suggest that for gaining credibility,
investors demand CSR disclosures of firms to be externally audited. Hence, the
decision to have an external audit of CSR report is a good indicator of a firms
commitment to its CSR responsibility and represents a strategic choice by some
firms.
152
GRI compliance: According to Henriques (2010), GRI reporting guidelines have been
developed by a multi-stakeholder process, which gives it a high degree of legitimacy,
and set out the most highly regarded and widely used set of environmental and
social indicators. The decision of companies to adhere to GRI guidelines suggests a
commitment to standardisation of their CSR reporting. In this context, Clarkson et al.
(2008) note the importance of compliance with GRI guidelines in CSR reporting, if
firms are to gain credibility among its various stakeholders. Hence, choosing to
voluntarily comply with GRI compliance is a strategic choice made by firms. By
complying with GRI guidelines, firms demonstrate their commitment to their
stakeholder responsibility (i.e., take their stakeholder responsibility seriously).
A firms CSR strategy is captured by the aggregated strategy score as described

above. It is reasonable to argue that the more of these strategy and policy measures
that a firm adopts, the more proactive and comprehensive (in terms of internal
capacities and external reputation building measures) is its CSR strategy. The CSR
strategy score ranges from 1 to 100 showing how a firm performs compared to the
entire Asset4 universe based on the value in the related indicator. In other words, the
score is normalized using Z-score, equally weighted and benchmarked against the
complete universe of 4000 companies in the Asset4 database. According to Asset4,
the aggregated vision and strategy score
Measures a companys commitment and effectiveness towards the

creation of an overarching vision and strategy integrating financial and
extra-financial aspects. It reflects a companys capacity to convincingly
show and communicate that it integrates the economic (financial), social
and environmental dimensions into its day-to-day decision-making
processes (Asset4 definition).
Hence, the higher a firms aggregated vision and strategy score, the more integrated
and comprehensive its CSR strategy. Table 6.1 shows the definitions and pair-wise
correlation of CSR strategy variables.
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Table 6.1 CSR vision and strategy (Definitions and pair-wise correlation matrix)
Variable (1) (2) (3) (4) (5) (6)

1 Integration of financial and extra-financial 1.00
reporting
2 CSR committee 0.35 1.00
3 GRI compliance 0.19 0.21 1.00
4 CSR global activities reporting 0.40 0.49 0.17 1.00
5 CSR report external audit 0.31 0.37 0.41 0.46 1.00
6 Vision and strategy 0.37 0.56 0.48 0.54 0.55 1.00
Notes: Integration of financial and extra-financial reporting (Yes/No): Is the company openly reporting about the
challenges or opportunities of integrating financial and extra-financial issues, and the dilemmas and trade-offs it
faces? CSR Committee (Yes/No): Does the company have a CSR committee or team? GRI compliance (Yes/No):
Does the company compliance with the Global Reporting Initiative guidelines? CSR global activities reporting
(Yes/No): Does the company's extra-financial reporting take into account the global activities of the company?
CSR report external audit (Yes/No): Does the company have an external auditor of its CSR/H&S/Sustainability
report? Vision and strategy score measures a companys commitment and effectiveness towards the creation of
an overarching vision and strategy integrating financial and extra-financial aspects. It reflects a companys
capacity to convincingly show and communicate that integrates the economic (financial), social and
environmental dimensions into its day-to-day decision-making processes.
Environmental and Social Performance Scores
ESP scores are described in Chapter 3 section 2.5.4.
6.3.2 Exogenous regressors and control variables

A number of exogenous regressors and control variables are defined as follows;
Firm size: natural logarithm of net sales; Profitability measured by return on equity:
ratio of net income before preferred dividends minus preferred dividend requirement
to the average of last year's and current years common equity; Capital expenditure:
ratio of capital expenditures to net sales; Strategic shareholdings: percentage of total
shares in issue held strategically and not available to ordinary shareholders, and
only holdings of 5% or more are counted as strategic; Slack: natural logarithm of the
sum of cash and short-term investments and total receivables; Leverage: ratio of
total debt to total assets; Board duality (dummy variable): 1 if the CEO
simultaneously chairs the board; 0 otherwise.
6.3.3 Models tested

To investigate whether board of directors is an endogenously determined institution,
structural equation modelling (SEM) technique is adopted. The following structural
equation model tests hypotheses 1, 2 and 3 simultaneously.
154
CSR strategy = Board CSR orientation + Slack + Leverage + e (6-1)
Environmental or social performance = CSR strategy + Firm size + Profitability
+ Capital expenditure + Strategic shareholdings + [Industry dummies] + [Year
dummies] + e (6-2)
Board CSR orientation = Environmental or social performance + Firm size +
Strategic shareholdings + Board duality + e (6-3)
To carry out this analysis, I use SEM procedure incorporated in Stata12. SEM19 is
covariance-based (linear model), which only applies to continuous endogenous
variables. This technique provides for use of latent (unobserved) constructs; for
dependent variables that simultaneously affect each other; and supports correlations
of errors including autocorrelation in panel data. Accordingly, this modelling tool is
used in above regression analysis, and standard errors are clustered at firm level to
account for panel structure of the data (specifically, possible non-independence of
observations corresponding to the same firms over years).
Board CSR orientation is a latent variable measured by three board attributes

variables, namely board independence, board diversity and audit committee
expertise. Other then the endogenous variables, control variables used in each
equation are based largely on prior related empirical evidence. It is necessary to
note that to show the direction of expected relation with the dependent variable, in
the following discussion, I provide the predicted sign for each control variable in
brackets. In Equation (6-1), CSR strategy is likely to be affected not just by board
CSR orientation (i.e., inclination), but also the availability of slack resources (positive,
based on the argument made by Clarkson et al. (2011) that firms pursuing a
proactive environmental strategy are most likely the ones with greater financial
resources), and, level of financial flexibility available i.e., leverage (negative, based
on Clarkson et al., 2011). In Equation (6-2), I model environmental and social
performance. Following Ioannou and Serafeim (2012) who investigate the
determinants of environmental and social performance in a cross-country setting, I
also control for: firm size (positive); profitability (positive); and strategic
shareholdings (negative). Following Clarkson et al. (2011), capital expenditure
19
The key advantages of the sem command from Stata 12 are: 1) it is easy to obtain standard errors, confidence intervals,
and associated tests that are robust to lack of independence within identified groups of observations (e.g., vce(cluster
group)); 2) it can be used when the data are unbalanced - mlmv (i.e., there is a different number of observations for
dependent variables). In other words, when there are missing values for dependent variable (so long as they are missing on
observables), one can still use the information on the other variables.
155
(positive) is also controlled for. In this equation, industry and year dummies are
included. In Equation (6-3), in addition to environmental and social performance, it is
expected that board CSR orientation is affected by: firm size (positive), as larger
firms are known to be more under the public eye and hence may face greater
stakeholder pressures, thus more likely to have board members with CSR orientation;
strategic shareholdings (negative), as equity holders are more likely to be
shareholder centric thus less inclined to have board members with CSR orientation;
and CEO duality (negative). One individual performing as both chairman and CEO
may constrain board independence that may reduce the overall accountability of the
firm and affect fair decision-making. For example, Shivdasani and Yermack (1999)
find that when two positions are combined, fewer independent non-executives are
appointed. Furthermore, Galbreath (2010) finds that firms which split the CEO-
chairman role demonstrate higher performance of their governance practices
regarding climate change e.g., board oversight dimension.
6.4 Sample and data

The sample is the intersection of the Asset4 and Datastream universe of UK listed
companies, covering the period 2002-2010. The intersection of these data sets
yields a usable sample of 2028 firm-year observations. This is mainly due to the
limited coverage by Asset4. Industries are classified by using the FTSE/DJ single-
digit Industry Classification Benchmark (ICB) March 2008 version. This leads to 10
industry groups including financials in the sample. Financials include banks,
insurances, real estate and financial services. Table 6.2 gives the break-up of
industries covered in the sample for each year.
Table 6.2 Number of sample companies in each sector and each year
Industry Industry 02 03 04 05 06 07 08 09 10 Total Percent
Code
0001 Oil & gas 4 4 12 13 13 14 14 18 19 111 5.47
1000 Basic materials 2 2 14 14 15 18 22 22 22 131 6.46
2000 Industrials 18 18 53 65 66 67 67 71 67 492 24.26
3000 Consumer goods 9 9 17 22 23 23 23 27 26 179 8.83
4000 Health care 3 3 4 5 5 5 5 9 9 48 2.37
5000 Consumer services 21 22 46 54 57 59 59 64 62 444 21.89
6000 Telecommunications 2 2 3 5 5 5 5 5 6 38 1.87
7000 Utilities 6 6 7 8 8 8 8 8 7 66 3.25
8000 Financials 18 19 49 54 54 60 60 63 60 437 21.55
9000 Technology 2 2 6 10 10 10 10 16 16 82 4.04
Total 85 87 211 250 256 269 273 303 294 2028 100.00
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As Table 6.2 shows general industrials, consumer services and Financials account
for the bulk of companies in the sample. The sample represents a wide range of
industries. The number of firms in each industry sector appears to increase over time,
apart from the years between 2009 and 2010 (i.e., the number of firms in some
sectors drops slightly).
A unique dataset Asset4 with environmental, social and governance (ESG) scores
and components is used. The G score of Asset4 provides details of each board
attributes and CSR strategy related variable.
6.5 Results

Table 6.3 reports the descriptive statistics for all variables used in the analyses.
Variable Mean S.D. Min Max

Environmental performance 59.21 27.46 9.54 97.17
Social performance 63.40 25.97 4.18 98.82
Board independence 51.54 14.23 0 100
Board diversity 7.57 9.04 0 62.5
Audit committee expertise 0.65 0.48 0 1
Board duality 0.04 0.19 0 1
CSR strategy 62.03 29.64 9.51 98.61
Firm size 14.05 1.67 7.45 19.33
Profitability (return on equity) 0.25 1.58 -9.04 58.80
Leverage 0.20 0.18 0 0.88
Capital expenditure 0.15 0.52 0 15.56
Strategic shareholdings 0.26 0.21 0 0.91
Slack 12.76 1.55 7.44 18.78
Note: All variables are as defined in the Variables and Models section.
As Table 6.3 shows, the mean values of environmental and social performance
scores are 59% and 63% respectively. About 52% of the board members of an
average firm are independent, while about 4% of the firms have the same person as
CEO and Chairman (i.e., duality). On average about 8% of board members are
women. 65% of audit committees have relevant expertise (i.e., with at least one
member being considered a "financial expert" within the meaning of Sarbanes-Oxley
given his or her extensive experience in accounting and auditing matters). The mean
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value of CSR strategy score (i.e., normalized Z-score) is 62. The average firm size
measured as natural logarithm of net sales is 14.05, which is equivalent to sales
value of 1.3 billion GBP. The mean values of profitability, leverage, capital
expenditure and strategic shareholdings are 25%, 20%, 15%, and 26% respectively.
The average slack resources available in a firm are 348 million GBP. Of note, the
number of observations for each variable varies slightly based on the availability of
data for the variable. Table 6.4 displays the pair-wise correlations for all variables.
Although firm size is highly correlated with slack (0.80), they are not included in the
same regression i.e., Equation (6-1). Table 6.4 shows a high correlation between
environmental performance and social performance (0.72), which is consistent with
Brammer et al.s (2006) finding that there is a high degree of association within
corporate social rating scores of the same category of EIRIS data; especially the
overall score is highly correlated with the environmental and social score
respectively. Given the relatively moderate levels of correlations among other
variables, multi-collinearity is not likely to be a problem for the analyses.
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Table 6.4 Pair-wise correlation matrix
Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
1 Environmental 1.00
performance
2 Social performance 0.72*** 1.00
3 Board independence 0.27*** 0.32*** 1.00
4 Board diversity 0.22*** 0.25*** 0.18*** 1.00
5 Audit committee 0.17*** 0.15*** 0.27*** 0.14*** 1.00
expertise
6 Board duality -0.11*** -0.11*** -0.13*** 0.02 -0.01 1.00
7 CSR strategy 0.69*** 0.67*** 0.28*** 0.21*** 0.14*** -0.12*** 1.00
8 Firm size 0.51*** 0.56*** 0.31*** 0.22*** 0.10*** -0.08*** 0.48*** 1.00
9 Profitability -0.02 -0.02 0.02 -0.02 0.05* -0.01 0.00 -0.01 1.00
10 Leverage -0.01 -0.05* -0.02 -0.11*** -0.01 0.04 -0.02 -0.07** 0.03 1.00
11 Capital expenditure -0.01 -0.09*** 0.00 0.01 0.00 -0.02 0.03 -0.28*** -0.02 0.05* 1.00
12 Strategic shareholdings -0.24*** -0.24*** -0.26*** -0.18*** -0.32*** 0.11*** -0.18*** -0.20*** 0.00 0.03 0.02 1.00
13 Slack 0.41*** 0.46*** 0.32*** 0.14*** 0.11*** -0.07** 0.42*** 0.80*** -0.02 -0.06* -0.14*** -0.16*** 1.00
Note: All variables are as defined in the Variables and Models section. p .10 , * p .05 , ** p .01 , *** p .001.
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6.5.2 Structural equation modelling results
Table 6.5 reports the results of structural equation modelling with respect to
environmental performance.
Table 6.5 Results of structural equation model with respect to environmental

performance (Standardized coefficients reported)
Structural model:
Dependent variable (Structural)
Independent variable CSR strategy Environmental Board CSR
performance orientation
Board CSR orientation 0.34*** (3.91)
CSR strategy 0.51*** (13.12)
Environmental performance 0.15* (2.06)
Firm size 0.28*** (7.91) 0.38*** (4.37)
Strategic shareholdings -0.12*** (-4.47) -0.44*** (-7.45)
Return on equity -0.01 (-0.69)
Capital expenditure 0.07** (2.74)
Slack 0.28*** (3.57)
Leverage 0.03 (0.70)
Board duality -0.05 (-0.61)
Oil and gas -0.11*** (-4.52)
Basic materials -0.04 (-1.42)
Industrials 0.02 (0.43)
Consumer goods 0.08** (2.70)
Health care -0.01 (-0.41)
Consumer services -0.08* (-2.03)
Telecommunications -0.00 (-0.16)
Utilities -0.01 (-0.29)
Technology -0.02 (-0.55)
Year fixed effects Yes
Intercept -1.12*** (-3.61) -0.90** (-3.16)
Measurement model:
Board Board diversity Audit committee
independence expertise
Board CSR orientation 0.52*** (9.44) 0.37*** (8.09) 0.39*** (7.09)
Intercept 2.05*** (4.50) -0.25 (-0.72) 0.22 (1.16)
Model summary:
Observations 2028
Clusters 308
Overall R-squared 62.21%
Notes: p .10, *p .05, **p .01, ***p .001. Z-statistics are in parentheses. Standard errors are clustered at firm level.
All variables are defined in the Variables and Models section.
The results of Table 6.5 show that in the measurement model, loadings
corresponding to all three indicators (namely board independence ( = .52, p < .001),
gender diversity ( = .37, p < .001), and audit committee expertise ( = .39, p < .001)
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are statistically significant and have correct signs. The standardized loadings
reported in Table 6.5 also illustrate that while the relative importance of gender
diversity and audit committee expertise are very similar, board independence loads a
bit more heavily on the latent construct, board CSR orientation.
The results of structural equation modelling in Table 6.5 support all of the three
hypotheses (i.e., H1, H2 and H3). Specifically, it is found that boards which are more
CSR oriented tend to show greater commitment to CSR by developing a more
integrated CSR strategy, which in turn allows them to achieve superior
environmental performance. Moreover, superior environmental performers also tend
to choose more CSR-conducive board attributes. Hence, the findings suggest the
existence of a cyclical link among a firms board CSR orientation, CSR strategy, and
its environmental performance.
The aforementioned relationships are not only statistically significant, but also
economically meaningful. In particular, one standard deviation increase in board
CSR orientation leads to an increase of CSR strategy by 0.34 of the respective
standard deviation ( = .34, p < .001). One standard deviation increase in CSR
strategy boosts environmental performance by 0.51 of the respective standard
deviation ( = .51, p < .001). Finally, one standard deviation increase in
environmental performance enhances board CSR orientation to somewhat smaller
extent, i.e., by 0.15 of the respective standard deviation ( = .15, p < .05).
The results with respect to control variables in Table 6.5 are as expected. Consistent
with Clarkson et al.s (2011) finding that only firms with sufficient financial resources
can pursue a proactive environmental strategy, a positive and significant relation is
also found between financial slack and CSR strategy ( = .28, p < .001). Moreover,
consistent with prior literature (Ioannou and Serafeim, 2012), firm size is positively
linked with environmental performance ( = .28, p < .001) and board CSR orientation
( = .38, p < .001). This indicates that larger firms being more visible to the public
face greater pressure from a variety of external stakeholders (Deegan, 2002; Patten,
2002b). Thus larger firms may be driven to do better in environmental performance
as well as board CSR orientation. Consistent with prior related literature (Ioannou
and Serafeim, 2012), strategic shareholdings is found to be negatively related to
environmental performance ( = -.12, p < .001) and board CSR orientation ( = -.44,
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p < .001), suggesting that large shareholders in a firm tend to be more interested in
shareholder, and less interested in other stakeholder interests. Contrary to my
expectations but consistent with the findings of Mallin and Michelon (2011), there is
no link between firm profitability (i.e., ROE) and E performance. Capital expenditure
consistent with previous findings (Clarkson et al., 2011) is positively linked with
environmental performance ( = .07, p < .01), suggesting that in general firms are
now investing in environmentally friendly technologies. Prior studies indicate that
environmental responsibility is influenced by the nature of business activities,
particularly by industry sectors most closely associated with environmental concerns
(Brammer and Pavelin, 2008). It is also found that firms in consumer goods industry
tend to do better in environmental aspect (as also found by Mallin and Michelon,
2011), while firms in oil and gas industry and consumer services sector tend to be
poorer environmental performers.
Overall, the findings are consistent with Hermalin and Weisbachs (2003) argument
that the board of directors of a firm is an endogenously determined institution. A
firms CSR performance is determined by its CSR vision and strategy which is
influenced by board level CSR orientation. Prior studies treating the link between
board attributes and CSR performance as an out-of-equilibrium phenomenon provide
a misleading interpretation of this relation. In fact, it can also be the other way
relation, that is, a firms environmental performance affects its board CSR orientation.
Table 6.6 reports the results of structural equation modelling with respect to social
performance. Overall, the results are very similar to those in Table 6.5. Notable
exception is that the coefficient on capital expenditure is not significant, indicating
that capital expenditure does not affect a firms social performance. This is quite
reasonable, given that better social performance is likely to be less financial capital
sensitive, but more human relational capital sensitive. Interestingly, it is found that
the coefficients on consumer goods and consumer services industries turn to be
insignificant. However, the coefficient on oil and gas industry remains negative and
significant. Overall, the differences in findings with respect to environmental and
social performance are in line with Cormier et al.s (2011) suggestion that it is
important to distinguish environmental performance from social performance in CSR
related studies.
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Table 6.6 Results of structural equation model with respect to social
performance (Standardized coefficients reported)
Structural model:
Dependent variable (Structural)
Independent variable CSR strategy Social Board CSR
performance orientation
Board CSR orientation 0.32*** (3.73)
CSR strategy 0.48*** (12.75)
Social performance 0.19** (2.55)
Firm size 0.31*** (9.30) 0.35*** (4.04)
Strategic shareholdings -0.15*** (-5.41) -0.44*** (-7.69)
Return on equity -0.01 (-0.53)
Capital expenditure -0.00 (-0.01)
Slack 0.29*** (3.68)
Leverage 0.03 (0.73)
Board duality -0.05 (-0.58)
Oil and gas -0.06** (-2.62)
Basic materials -0.04 (-1.35)
Industrials 0.03 (0.89)
Consumer goods 0.04 (1.25)
Health care 0.01 (0.39)
Consumer services -0.01 (-0.32)
Telecommunications 0.01 (0.37)
Utilities 0.00 (0.18)
Technology 0.04 (1.27)
Year fixed effects Yes
Intercept -1.10*** (-3.48) -0.68* (-2.33)
Measurement model:
Board Board diversity Audit committee
independence expertise
Board CSR orientation 0.53*** (9.76) 0.37*** (8.20) 0.38*** (7.13)
Intercept 2.08*** (4.64) -0.24 (-0.69) 0.27 (1.42)
Model summary:
Observations 2028
Clusters 308
Overall R-squared 62.33%
Notes: p .10, *p .05, **p .01, ***p .001. Z-statistics are in parentheses. Standard errors are clustered at firm level.
All variables are defined in the Variables and Models section.
Table 6.7 provides a summary of the standardized results with respect to E and S
performance respectively.
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Table 6.7 Summary of structural equation modelling results (Standardized
coefficients reported)
Predicte Path coefficients
Research hypothesis d sign Environmental Social Final result
performance performance
H1: Board CSR orientation -> + 0.34*** (3.91) 0.32*** (3.73) Supported
CSR strategy
H2: CSR strategy -> + 0.51*** (13.12) 0.48*** (12.75) Supported

Environmental or social
performance
H3: Environmental or social +/- 0.15* (2.06) 0.19** (2.55) Supported

performance -> Board CSR
orientation
Notes: p .10, *p .05, **p .01, ***p .001. Z-statistics are in parentheses.
6.6 Sensitivity analyses
6.6.1 Size effect and FTSE 100 dummy

To test the robustness of the above results, a number of sensitivity tests are carried
out. It is argued in the literature that environmental and social responsibility is mainly
driven by firm size (Brammer and Pavelin, 2008). Hence, an alternative size
measure, namely the natural log of total assets is used in all regressions, which
provides results similar to those reported. Furthermore, it can also be argued that
CSR strategy and performance is a concern for only the largest firms. Therefore,
FTSE 100 dummy variable is added as a determinant of CSR strategy and/or
environmental and social performance regression (i.e., Equation (6-1) and/or (6-2) in
the structural equation model). While the coefficients on FTSE 100 dummy are
significant in all cases, the other results remain unchanged.
6.6.2 Analysis using alternative CSR strategy and environmental and social
measures
It can be argued that the results may be sensitive to a self-reporting or source bias,
as the same database for the environment, social, and governance variables is used
in the analysis. Hence, validity and reliability checks are conducted for above results,
using two further data sources, namely hand collected CSR strategy variable and
Bloomberg environmental and social scores. First, aggregated CSR strategy variable
from Asset4 is replaced by a CSR strategy variable for 2009. This is based on hand-
collected data for FTSE 350 non-financial companies in 2009. The aggregated score
is the sum of eight components (all dummy variables derived from Clarkson et al.s
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(2008) framework): existence of CSR committee, executive remuneration linked pay
policy, external audit of CSR report, use of technology or innovation to improve CSR
performance, participation with non-governmental organisations (NGOs) or other
industries to improve CSR performance, internal audit of CSR report, environmental
awards, and CSR policy statement. Content analysis approach is used to codify
companies voluntary reporting in these areas, using their sustainability reports
and/or websites information which is publicly available. If a company provides
information about any component, then it will be scored 1; and 0 otherwise. It is
worth mentioning that due to time constraint, the hand-collected data is only
available for year 2009. Table 6.8 reports the summary of the standardized results,
replacing the Asset4 CSR strategy variable with hand developed CSR strategy
variable. As Table 6.8 shows, the results remain largely similar to the main results in
Table 6.7.
Table 6.8 Results of alternative measure of CSR strategy (Standardized

coefficients reported)
Predicted Path coefficients
Research hypothesis sign Environmental Social Final result
performance performance
H1: Board CSR orientation -> + 0.39*** (3.79) 0.30** (2.82) Supported
CSR strategy
H2: CSR strategy -> + 0.47*** (5.48) 0.30** (3.02) Supported

Environmental or social
performance
H3: Environmental or social +/- 0.11 (0.84) 0.39*** (3.27) Partially

performance -> Board CSR supported
orientation
Note: CSR strategy variable is measured as the sum of eight components (dummy variables) collected manually
from companies CSR reports and/or websites in 2009. Z-statistics are in parentheses. Standard errors are
clustered at firm level. All variables are as defined in the Variables and Models section. In the interest of brevity,
results for control variables are not reported. p .10, * p .05, ** p .01, *** p .001.
In another test, Asset4 environmental and social scores for 2009 are replaced by
Bloomberg environmental and social disclosure scores in 2009. These disclosure
scores are used as a proxy for a firms environmental and social performance, as
these are based on hard information, which as Clarkson et al. (2008) find is difficult
for poor performers to mimic. Finally, three different datasets are used at the same
time for the year 2009. In other words, board attributes data is from Asset4,
environmental and social scores are from Bloomberg and the CSR strategy variable
is based on hand collected data. Similar results are generated for the latter two sets
165
of analyses (not reported). Overall, these findings are consistent with the main
findings in Table 6.5 and 6.6. Hence, self-reporting bias of the same data source
used is less likely in this study.

This chapter examines the relations among board CSR orientation, CSR strategy
and firm environmental and social performance. Using a large sample of UK listed
firms, it is found that boards having certain CSR-conducive attributes particularly
independent directors, women directors and directors with financial expertise are
more likely to develop a multi-pronged CSR strategy which in turn translates into
superior environmental and social performance. Furthermore, it is found that firms
with better environmental and social performance tend to strengthen their board level
CSR orientation. In other words, the link between firms board CSR orientation, CSR
related strategy, and their environmental and social performance is found to be
endogenous and self-reinforcing.
Research in the field of the determinants of CSR performance has attracted the
attention of scholars from diverse disciplines including management and corporate
governance. This study makes significant contributions to existing literature. While
the findings are consistent with the theoretical predictions and empirical findings of
studies from both streams of literature, this chapter builds on these studies by
making new conceptual and methodological advancements. For studies drawing on
the resource-based view of the firm (e.g., Al-Tuwaijri et al., 2004; Clarkson et al.,
2011), it builds conceptually and improves methodologically by incorporating
variables that directly measure board level competencies and strategies that lead to
superior environmental and social performance. For studies drawing on the resource
dependency theory and examining the link between board attributes and CSR
performance, it builds conceptually by developing a theoretical model based on
Hermalin and Weisbach (2003).
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Chapter 7: Conclusions and implications
The primary aim guiding this entire research is to investigate whether corporate
environmental and social responsibility matters for firm performance in the UK. To
meet this aim, three research objectives were developed: first, to investigate the
relation between firms ESD and their operating profitability, as well as to investigate
the potential causality regarding this link; second, to examine the link between ESD
and firms market value, employee productivity and carbon eco-efficiency
respectively; and finally to examine the relations among CSR related board attributes,
CSR strategy and firms environmental and social performance. Three empirical
studies are conducted in chapter 4, 5 and 6 respectively to address these research
objectives.
7.1 Research findings and implications

Chapter 4 examines the link between firms environmental and social disclosures
and their operating profitability. It is found that more profitable firms tend to make
more environmental and social disclosures. These findings are consistent with the
accounting and economics based arguments that environmental and social
disclosures are a real as well as an opportunity cost that more profitable firms with
higher slack resources are better able to afford. Moreover, it is found that while
current operating performance (which is relevant for current environmental impact)
matters for current environmental disclosures; it is the past operating performance
that drives current social disclosures (as per the results of Granger causality test).
The reason for the latter finding could be that effects of past profitability and
presumably past investments in social arena become apparent only in the
subsequent period, which is then reported.
Chapter 5 investigates the relation between firms environmental and social

disclosures and their market value, employee productivity and carbon eco-efficiency.
It is found that higher overall environmental and social, but particularly social
disclosures matter to investors. Investors appear to be placing higher values on firms
seen to be behaving in a socially responsible manner. More responsible behaviour in
the social arena as reflected by its subsequent disclosure, helps mitigate the
information asymmetry and hence the perceived social risks of the firm. Therefore,
investors place higher values on such firms. In addition, the results of the sub tests
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(i.e., the link between a firms social (environmental) disclosure and its social
(environmental) performance) show that more social (environmental) disclosure in
prior year reflects better social (environmental) performance captured by higher
employee productivity (more carbon eco-efficiency) in the current year. Taken
together, the results of Chapter 4 and 5 are consistent with the predictions of the
voluntary disclosure theory (Verrecchia, 1983) which suggests that despite being
costs, firms are willing to provide relevant information voluntarily to the market, if the
expected benefits of such disclosures are higher than the associated costs.
The findings of these two chapters provide several implications. From a regulatory
perspective, the findings imply that if higher and better quality disclosures of a firms
environmental and social performance are desirable; and if these are profit and
resource dependent, there may be room for some minimum regulatory requirements
for such disclosures, coupled with economic incentives that encourage firms to
behave in an environmentally and socially responsible manner. For investors, the
findings suggest that while environmental disclosure is value relevant, so is social
disclosure. To date, most research in CSR has focused on the link between firms
environmental disclosures and their economic performance. These findings suggest
that social disclosures matter perhaps more to investors, implying that investors are
more sensitised to how firms address their human relation challenges.
Chapter 6 examines the relations among board attributes, firm CSR strategy and its
environmental and social performance. It is found that boards having certain CSR-
conducive attributes particularly independent directors, women directors and
directors with financial expertise, are more likely to develop a multi-pronged CSR
strategy which in turn translates into superior environmental and social performance.
Furthermore, it is found that firms with better environmental and social performance
tend to strengthen their board level CSR orientation.
These findings provide some useful implications for industry as well as the academia.
For industry, these findings suggest that firms with the combination of right people on
the board and the right CSR strategy are likely to be better equipped in meeting their
environmental and social challenges. For academia, the findings suggest that in
order to develop a more comprehensive analysis, it is important to incorporate
explicitly the two sets of factors, namely board attributes and CSR strategy variables,
168
in any analysis of the drivers of CSR performance. In particular, for research
scholars working in the field of CSR, whether from a management or a governance
perspective, the findings imply that in order to develop a more holistic understanding
of how corporate boards are responding to CSR challenges, it is important to
consider explicitly the links between director characteristics, board level decisions
and firm CSR performance, taking into account the potential endogeneity of these
links. The approach adopted in this study to the best of my knowledge, provides the
first step in this direction. From the broader corporate governance research
perspective, the conceptual and methodological approach adopted in this study, can
be adapted to any study of the links between various aspects of board attributes,
board decisions and firm performance.
In addition, the finding of the endogenous link between board attributes and CSR
performance has significant policy implications. First, if board attributes and firm
performance are indeed endogenous outcomes, then policy makers need to take into
consideration the implications of this endogeneity when considering CSR related
policies affecting the design of the corporate boards. For example, one policy
implication of this finding would be that for poor CSR performers, mandating the
inclusion of women on board (which is currently under debate in policy circles in the
UK and EU), could act as a welcome exogenous shock for improving their CSR
performance. Second, the findings of a virtuous circle between board CSR attributes,
CSR strategies and CSR performance, while consistent with the predictions of RBV
theory, raise concerns about how firms are using these competitive advantages. As
the gap between the leads and the laggards in CSR performance widens (which the
findings of the virtuous circle imply), this could either be a source of the good or the
bad of CSR (Devinney, 2009). If it is the good, then social entrepreneurship on the
part of leading corporations can enhance the societal wellbeing; but, if it is the bad,
then firms may be using CSR to create regulatory competition, with the aim to
squeeze out the laggards from the market, to the detriment of competitive markets
(Devinney, 2009). Hence, it is important for regulatory bodies to be mindful of these
consequences when designing policies related to CSR.
169
7.2 Research limitations
There are some limitations of this research. One important limitation is that this entire
analysis relates to the largest listed firms in the UK. Environmental and social
disclosures are also important for smaller firms. Future work could include smaller
firms to examine links between their environmental and social disclosures and
financial performance, but until smaller firms start reporting their environmental and
social information; scope for such work may be limited.
Second, this study is limited to a single country future research can include several
countries or extend similar analysis to compare two different countries. For example,
future research can examine the links among CSR related board attributes, CSR
strategies and firms environmental and social performance in developing countries.
Moreover, a comparative study between the UK and the US context can also be
carried out to test whether similar results hold.
Finally, some variables can be captured in a more comprehensive way. For example,
employee productivity can be measured by using an employee satisfaction based
survey that can better reflect employee productivity. In addition, Business ethics are
moral principles that guide the way a business behaves. It can be argued that
environmental and social issues can be linked with business ethics, which can be
investigated by conducting interviews with CSR practitioners in future research.
7.3 Future research

The results reveal that it is not just environmental but social disclosures that
investors value. To date, most research in CSR has focused on firms environmental
aspects. It would be worthwhile for future research to examine in greater detail the
social aspects of CSR, particularly the link between social disclosure, indicators of
social performance and financial performance. It may also be worth examining the
influences of individual environmental and social indicators on firm performance. For
instance, investigate the aspects of social indicators which add economic value such
as employee CSR training and employee health and safety policy. Furthermore,
future research can also examine the levels or content of environmental and social
disclosures through in-depth case study or survey based analysis. For example,
collect a firms sustainability report over several years, read and codify its information
to examine the real motivation behind its reports. In other words, it is worth noting
170
that from a theoretical perspective, information about a firms environmental and
social disclosures can be open to questions about impression management and
institutional influences etc.
The findings suggest that it is important to consider explicitly board level governance
structures and CSR strategy in an analysis of firms social or environmental
performance. It would be useful for future research to examine in more depth the
roles that various human and relational capital characteristics on the board like
education, professional experience and social networks may play in achieving firms
CSR goals. In addition, other governance mechanisms such as shareholder activism,
institutional ownership influences on firms CSR disclosures and/or performance can
be further explored.
171
Appendices
Appendix 1: Review of existing corporate social responsibility related indices
CSR
assessment What the tool covers Data sources/methodology Advantages and/or drawbacks
tools
Moskowitz Rank firms in terms of outstanding, Survey-evaluated by the author, a Drawback:
(1972) honorable mention or worst panel of businessmen and MBA - Only one dimension measurement
reputation students
index
- Environment
- Charitable giving Each company's social Advantage:
Council of - Women in management performance is objectively - Researches in the 1970s have used the
Economic - Minority management measured in eleven issue areas CEP rating broadly
Priorities - Animal testing summarized in CEP's unique rating
(CEP) in - Information disclosure system. Company performance is
1977 - Community outreach monitored throughout the year with
- South Africa changes noted in quarterly reports.
- Family benefits
- Military work
- Nuclear involvement
Carroll (1979) proposed a model Advantages:
A three-dimensional model of corporate that contains the following four - A multi-dimensional model of CSP
social performance (1991) categories of corporate - The model is simple, easy to understand
Carroll -social responsibilities can be categorized responsibility in decreasing order of and has an intuitively appealing logic,
corporate into four groups: economic, legal, ethical importance: - Most durable and widely cited in the
social and discretionary responsibilities, which a) Economic be profitable; literature, has been tested and supported by
performance are not mutually exclusive b) Legal - obey the law; previous findings
(CSP) model -include 6 social issues: consumerism, c) Ethical- do what is right and fair,
(1979, 1991) environment, discrimination, product and avoid harm; Drawbacks:
safety, occupational safety and d) Discretional / philanthropic- be a - Gives top priority to the economic
shareholders good corporate citizen. dimension as an aspect of CSR
-social responsiveness philosophy - The major problem is that social issues
172
change and they differ for different industries
Fortune has conducted the survey Advantages:
Eight attributes each fall since 1982 and published - It provides comparable data over an
- Quality of management summary results each January. extended period
McGuire et - Quality of products and services The survey covers the largest firms - The number of respondents is comparable
al. (1988) offered in 20-25 industry groups (the or superior to those of other ratings.
Fortune - Innovation number of industry groups varies
magazines - Value as a long-term investment from year to year). Over 8000 Drawbacks:
rating of - Soundness of financial position executives, outside directors, and - Respondents rate only firms in an industry
corporate - Ability to attract and retain talented corporate analysts are asked to with which they are familiar (i.e., respondents
reputation people rate the ten largest companies in are selected for their knowledge of a
- Responsibility to the community their industry on 8 attributes; and particular industry rather than for their
and the environment each attribute scores from 0 (poor) specific knowledge of or interest in CSR)
- Wise use of corporate assets to 10 (excellent). - Evidence for the validity of the evaluations
comes from empirical studies using other
dimensions of the Fortune survey and have
found that the Fortune evaluations of firms
financial performance are highly correlated
with accounting and stock-market based
performance measures.
13 ratings produced by NCG, 4 main
elements including CSR disclosure, The assessment of companies in Advantage:
womens position, ethnic minorities the NCG book covers the years - Previous researchers do not differentiate
position, philanthropy and environmental 1988 and 1989. The ratings were between CSR performance and CSR
actions complemented by primary data disclosure, the NCG ratings include CSR
Adams et al. - CSR disclosure (-2, 2) collected via a multi-wave mail disclosure as one of the CSR performance
(1991) New - the advancement of women (-1, 2) survey directed to companies. The measurement
Consumer - the advancement of ethnic last four aspects are applied to
Group (NCG) minorities (-1,1) relevant industries not all firms. Drawback:
ratings - philanthropy or charitable giving - The main focus of the NCG organisation is
and involvement to community the consumer sector. Sectors such as
projects (-1,1) financial services and media related products
- environmental action to reduce its were not included, due to the difficulties
environmental impact or improve associated in the assessment of CSR
its environmental protection performance
173
performance (0,2)
- donation to the British political
parties in the 1986-1990 period
(yes/no)
- subscription to the economic
league (yes/no)
- a significant effect on the
environment (0,3)
- respect for life
- respect for people
- Doing business with oppressive
regimes
- Production and/or sales of military
equipment
- business relationships with the
least developed countries
Data are collected in a disciplined Advantages:
13 dimensions of CSR process from a wide variety of - Widely accepted by practitioners and
- community company, government, non- academics as an objective measure of CSR
- corporate governance government organisation and - All companies in the S&P 500 are rated.
- diversity media sources, using surveys, - Each company is rated on multiple
- employee relations financial statement information, attributes considered relevant to CSP
- environment reports from mainstream media, - A single group of researchers, working
- human rights government documents and peer- independently from the rated companies or
- product quality and safety reviewed legal journals. Once the any particular brokerage house, applies the
- alcohol information is collected, KLD rates same set of criteria to related companies
KLD rating - firearms the social, environmental and - The criteria are applied consistently across
- gambling governance performance of a wide range of companies, with data
- military companies using a proprietary gathered from a range of sources, both
- nuclear power framework of positive and negative internal and external to the firm
- tobacco indicators. Companies are rated in
seven major qualitative issue Drawbacks
areas: Environment, Community, - The binary ratings do not distinguish
Corporate Governance, Diversity, between the levels of e.g., hazardous waste
Employee Relations, Human production.
174
Rights and Product Quality and - Firms in heavy polluting industries like Oil
Safety. Analysts assign Strengths and Gas have lower KLD score than other
and Concerns associated with firms that have very limited or no disclosure
these issues, providing a social to e.g., producing hazardous waste,
and environmental profile of regardless how well the firm manages its
companies. The business hazardous waste.
involvement screens are - The number of measures within each of
associated with activities that are KLDs dimensions can skew overall CSP
controversial to certain social scores. E.g., a firm has a total of 5 strengths
investors. and 10 concerns. By definition, the KLD
ratings system is biased toward a higher
concern score for those industries disclose
information about their environmental
concerns.
The data is in the form of a searchable Advantage:
database with roughly 170 questions The thrust of the database is -The answers or responses are both
covering the whole range of social overwhelmingly based on quantitative and qualitative
EIRIS concerns. exception reporting or negative
performance - Environment screening. Drawbacks:
criteria - Employee -There is little order in the database,
- Community and Society questions can jump from one area to another
- Human rights and then back again.
- Supply chain - An entry is made, if something bad has
For example, key ESG criteria - board been noted. If there is no negative
practice, bribery, human rights, labor information, no comment is made. Therefore,
standards in the supply chain, health and a company with little comment or profile
safety, environment, and climate change would be judged to have high CSR and vice
versa.
- Do not distinguish between general and
industry-specific ESG criteria.
10 KPIs and a transparency indicator
- Energy productivity Data is sourced from ASSET4, a Advantages:
- Carbon productivity Thomson Reuters business, and - ESG information was obtained from a group
Corporate - Water productivity the BLOOMBERG of data providers rather than a single data
Knights - Waste productivity PROFESSIONAL. The KPIs were provider
175
Research - Leadership diversity developed by CKRG, a signatory to - ESG data was integrated with financial data
Group - CEO-to-average worker pay the UNPRI. to enhance analysis
(CKRG) - % tax paid - A greater number of companies from
index and - Sustainability leadership emerging markets were included in the
rank for - Sustainability remuneration analysis
Global 100 - Innovation capacity - Cross industries
(2010) - Transparency
Each company receives a score of 0 to 1
per KPI and a score of 0 to 1 on the
transparency indicator.
176
Appendix 2: E, S and G indicators with Bloomberg fields
Environmental
Percent of Disclosure PERCENT_OF_DISCLOSURE
Direct CO2 Emissions DIRECT_CO2_EMISSIONS
Indirect CO2 Emissions INDIRECT_CO2_EMISSIONS
Travel Emissions TRAVEL_EMISSIONS
Total CO2 Emissions TOTAL_CO2_EMISSIONS
CO2 Intensity (Tonnes) CO2_INTENSITY
CO2 Intensity per Sales CO2_INTENSITY_PER_SALES
GHG Scope 1 GHG_SCOPE_1
Total GHG Emissions TOTAL_GHG_EMISSIONS
NOx Emissions NOX_EMISSIONS
SO2 Emissions SO2_EMISSIONS
SOx Emissions SULPHUR_OXIDE_EMISSIONS
VOC Emissions VOC_EMISSIONS
CO Emissions CARBON_MONOXIDE_EMISSIONS
Methane Emissions METHANE_EMISSIONS
ODS Emissions ODS_EMISSIONS
Particulate Emissions PARTICULATE_EMISSIONS
Total Energy Consumption ENERGY_CONSUMPTION
Electricity Used (MWh) ELECTRICITY_USED
Renewable Energy Use RENEW_ENERGY_USE
Water Consumption WATER_CONSUMPTION
Water/Unit of Prod (in Liters) WATER_PER_UNIT_OF_PROD
% Water Recycled PCT_WATER_RECYCLED
Discharges to Water DISCHARGE_TO_WATER
Waste Water (Th Cubic Meters) WASTE_WATER
Hazardous Waste HAZARDOUS_WASTE
Total Waste TOTAL_WASTE
Waste Recycled WASTE_RECYCLED
Paper Consumption PAPER_CONSUMPTION
Paper Recycled PAPER_RECYCLED
Fuel Used (Th Liters) FUEL_USED
Raw Materials Used RAW_MAT_USED
% Recycled Materials PCT_RECYCLED_MATERIALS
Gas Flaring GAS_FLARING
Number of Spills NUMBER_SPILLS
Amount of Spills (Th Tonnes) AMOUNT_OF_SPILLS
Nuclear % Total Energy NUCLEAR_%_ENERGY
Solar % Total Energy SOLAR_%_ENERGY
Phones Recycled PHONES_RECYCLED
Environmental Fines # NUM_ENVIRON_FINES
Environmental Fines $ ENVIRON_FINES_AMT
177
ISO 14001 Certified Sites ISO_14001_SITES
Number of Sites NUMBER_OF_SITES
% Sites Certified %_SITES_CERTIFIED
Environmental Accounting Cost ENVIRONMENTAL_ACCTG_COST
Investments in Sustainability INVESTMENTS_IN_SUSTAINABILITY
Energy Efficiency Policy ENERGY_EFFIC_POLICY
Emissions Reduction Initiatives EMISSION_REDUCTION
Environmental Supply Chain ENVIRON_SUPPLY_MGT
Management
Green Building Policy GREEN_BUILDING
Waste Reduction Policy WASTE_REDUCTION
Sustainable Packaging SUSTAIN_PACKAGING
Environmental Quality Management ENVIRON_QUAL_MGT
Policy
Climate Change Policy CLIMATE_CHG_POLICY
New Products - Climate Change CLIMATE_CHG_PRODS
Biodiversity Policy BIODIVERSITY_POLICY
Environmental Awards Received ENVIRONMENTAL_AWARDS_RECEIVED
Verification Type VERIFICATION_TYPE
Social
Number of Employees NUMBER_EMPLOYEES_CSR
Employee Turnover % EMPLOYEE_TURNOVER_PCT
% Employees Unionized PCT_EMPLOYEES_UNIONIZED
Employee Average Age EMPLOYEE_AVERAGE_AGE
% Women in Workforce PCT_WOMEN_EMPLOYEES
% Women in Mgt PCT_WOMEN_MGT
% Minorities in Workforce PCT_MINORITY_EMPLOYEES
% Disabled in Workforce PCT_DISABLED_IN_WORKFORCE
% Minorities in Mgt PCT_MINORITY_MGT
Workforce Accidents WORK_ACCIDENTS_EMPLOYEES
Lost Time from Accidents LOST_TIME_ACCIDENTS
Lost Time Incident Rate LOST_TIME_INCIDENT_RATE
Fatalities - Contractors FATALITIES_CONTRACTORS
Fatalities - Employees FATALITIES_EMPLOYEES
Fatalities - Total FATALITIES_TOTAL
Community Spending COMMUNITY_SPENDING
Employee Training Cost EMPLOYEE_TRAINING_COST
SRI Assets Under Management SRI_ASSETS_UNDER_MANAGEMENT
# Awards Received AWARDS_RECEIVED
Health and Safety Policy HEALTH_SAFETY_POLICY
Fair Remuneration Policy FAIR_REMUNERATION_POLICY
Training Policy TRAINING_POLICY
Employee CSR Training EMPLOYEE_CSR_TRAINING
Equal Opportunity Policy EQUAL_OPPORTUNITY_POLICY
Human Rights Policy HUMAN_RIGHTS_POLICY
UN Global Compact Signatory UN_GLOBAL_COMPACT_SIGNATORY
178
Governance
Size of the Board BOARD_SIZE
Indep Directors INDEPENDENT_DIRECTORS
% Indep Directors PCT_INDEPENDENT_DIRECTORS
% Women on Board %_WOMEN_ON_BOARD
Board Average Age BOARD_AVERAGE_AGE
Board Age Limit BOARD_AGE_LIMIT
Board Duration (Years) BOARD_DURATION
# Board Meetings BOARD_MEETINGS_PER_YR
Audit Committee Meetings AUDIT_COMMITTEE_MEETINGS
Board Mtg Attendance BOARD_MEETING_ATTENDANCE_PCT
Political Donations POLITICAL_DONATIONS
CEO Duality CEO_DUALITY
Business Ethics Policy ETHICS_POLICY
GRI Criteria Compliance GRI_COMPLIANCE
179
Appendix 3: Variable definitions, measures and data sources
Category Measure Definition/Measurement Source
Environment E Environmental score (60 environmental data points adjusted by industry and weighted by importance) ranges Bloomberg
and social from 0 to 100%.
disclosures S Social score (26 social data points adjusted by industry and weighted by importance) ranges from 0 to 100%. Bloomberg
Governance G Governance score (14 governance data points adjusted by industry and weighted by importance) ranges from Bloomberg
0 to 100%.
Slack Slack Slack resources natural logarithm of the sum of cash & short-term investments (02001) and total receivables Worldscope
(02051).
ROA Return on assets the ratio of earnings before interest and taxes (18191) to total assets (02999) at the Worldscope
beginning of the year i.e. EBITt/TAt-1.
Operating Return on equity (DWRE) - the ratio of net income before preferred dividends minus preferred dividend
Profitability ROE requirement to last year's common equity. The calculation differs from Worldscope. Datastream data is based Datastream
on the current period, and Worldscope is an average of prior and current period Equity.
ROS Return on sales the ratio of earnings before interest and taxes (18191) to net sales (01001). Worldscope
Size_emp Size natural logarithm of employee number (07011). Worldscope
Size_sales Size natural logarithm of net sales (01001). Worldscope
Leverage Leverage - Total debt (03255) divided by total assets (02999). Worldscope
Fin_acts Financial activities - the ratio of net proceeds from sale/issue of common and/or preferred stock (04251) during Worldscope
Firm
the year divided by total assets (02999) at the beginning of the year.
characteristics
Capex Capital expenditure - the ratio of capital expenditures (04601) divided by net sales (01001). Worldscope
Media exposure natural logarithm of the number of environmental news exposed. It is obtained by searching
Media companys name and any one of the terms environment sustainability, waste management, pollution and Nexis@UK
environmental award within all English language news published over the world. Specific date for each year is
from 1 January 200X to 31 December 200X.
Str_holds Strategic holdings - the percentage of total shares in issue held strategically and not available to ordinary Datastream
shareholders (NOSHST). Holdings of 5% or more are counted as strategic.
Capital market Analyst Analyst coverage - number of analysts issuing earnings forecasts for the firm. IBES
coverage
Market value Q ratio Tobins Q - total assets (02999) plus market value of equity (MV) minus book value of equity (03501) divided by Datastream
total assets (02999).
Employee Sales (01001) to employee number (07011) ratio. Worldscope
Other productivity
stakeholders Carbon Carbon emission to sales (01001) ratio. Carbon
intensity Disclosure
Project
180
Appendix 4: A plot of E/S/ES disclosure distribution
80
60
Frequency
40
20
0
0 20 40 60
ENVIRON_DISCLOSURE_SCORE
150
100
Frequency
50
0
0 20 40 60 80
SOCIAL_DISCLOSURE_SCORE
181
60
40
Frequency
20
0
20 40 60 80 100 120
the sum of E and S scores
182
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Does Corporate Environmental and

Social Responsibility Matter for Firm

the University of Exeter

as a thesis for the degree of

Doctor of Philosophy in Accountancy

I am sincerely and heartily grateful to my supervisors, Dr. Amama Shaukat and

I am also deeply indebted to Professor Richard Macve, Professor David

Table 2.1 A summary of relevant frameworks .................................................. 50

Figure 3.1: Existing Literature (Two Main Streams)...96

Counting your business costs while hiding your greenhouse gas

There has also been a substantial increase in socially responsible investment in

While studies drawing on the management literature particularly the resource

1.2 Research aim and objectives

1. To investigate the relation between a firms ESD and its operating

1.3 Structure of the thesis

Overall, this thesis makes a number of contributions to existing CSR studies.

Finally, contrary to prior studies the majority of which focus on environmental

On 20 June 2012, the UK Deputy Prime Minister, Mr Nick Clegg,

Moreover, the credit crisis has caused mainstream investors to become

2.1.1 Definitions and background

Commission of the European Communities (2002) defines corporate social

companies having responsibilities and taking actions beyond their

According to Dahlsruds (2008) study, the UK government (2001) states that

recognizes that the private sectors wider commercial interests

The term ESG appears in the United Nations Principles of Responsible

2.1.2 Difference and linkage between environmental and social

Patten (2002a) examines the relationship between environmental disclosure

In this thesis, Chapter 4 examines ESD and firm profitability; Chapter 5

Environmental and social information from a firm addresses several stakeholder

In the following section, first, general voluntary disclosure theory is introduced,

2.2.1 General voluntary disclosure theory

Voluntary disclosure refers to information made public through a firms free

The primary insight from theoretical work is that managers disclose

Furthermore, Tian and Chen (2009) state that,

Compulsory information disclosure means relevant laws and rules,

Voluntary disclosures can include strategic information such as company

Costs and benefits analysis

Managers of companies provide voluntary information which they consider is

However, providing voluntary information may decrease competitive advantage,

Hence, it is important for firms to balance the benefits of voluntary disclosure

It is worth mentioning the proprietary costs theory. Proprietary information is

any information whose disclosure potentially alters a firms future

2.2.2 Theoretical frameworks underlying ESD

One stream of existing literature uses legitimacy or political economy theories to

The other stream of studies attempts to use economics based theories to

However, according to Hershcovis et al. (2009),

while the socio-political theorists more often present sustainability

Hershcovis et al.s (2009) argument indicates that the learning curve of

2.2.2.1 Legitimacy theory

The concept of legitimacy is central to legitimacy theory. Legitimacy is defined

Legitimacy theory implies a reactive or proactive approach of companies to

According to Deegan and Unerman (2006),

political economy theory explicitly recognises the power conflicts

Hence, based on political economy theory, environmental and social reports

Economics based voluntary disclosure theories

2.2.2.3 Agency theory

Recently, Jo and Harjoto (2012) investigate the relation between CSR

As mentioned above, from the overinvestment perspective, Barnea and Rubin

2.2.3 Drivers of ESD