Please note! This essay has been submitted by a student.
To the stakeholder, responsiveness about the state of the environment is not a new thing. Many researchers have outlined the issue of environment disclosure (Das et al., 2008). Only a little association has been found between the environmental performance of companies and the conversation of that performance. Environmental disclosures are found inadequate, ambiguous and unreliable in most of the annual reports of US companies (Wiseman, 1982; Freedman & Wasley, 1990; Gamble et al., 1995; Neu et al., 1998).
Companies tend to increase information disclosure when the media focuses on the environmental problems and prospects (Neu et al., 1998). In addition to providing a link between stakeholder interest and environmental disclosure, it is concluded that decline in net income seeks to rise in disclosure as management tries to distract stakeholders focus from poor financial performance (Neu et al., 1998; Freedman & Jaggi, 1988). Stanwick found that higher financial performers tend to follow strong environmental commitment with environmental policy than lower financial performers in which the highest environmental performance description is given by mid-level financial performers (Stanwick & Stanwick, 2000) where inverse relation existed between corporate social performance and pollution emissions (Stanwick & Stanwick, 1998).
Firms have better financial improvement after the material improvement of their environmental performance in which profitability was low prior to the environmental decline (Clarkson et al., 2011). Based on a meta-analysis of 52 studies, Orlitzky (2003) found that among the corporate social performance indicators, reputation has a higher association with the corporate financial performance which is an accounting-based indicator rather than a market-based indicator. Analysis of leading companies of Bursa Malaysia reveals that materials, energy, water and social aspect have a significant impact on both ROA and ROE (San Ong et al., 2014).
A case study on 41 out of 166 manufacturing companies of Bangladesh clarifies that 47.4% variation in ROA can be explained by environment accounting reporting disclosure (Rakiv et al., 2016). It ensures a significant positive relationship between ROA and environmental reporting (Rakiv et al., 2016; Rajput et al., 2013; Bassey et al., 2013). Although Juhmani (2014) found that, among the listed companies of Bahrain, 57.57% sample companies disclose environmental information but (Sarumpaet, 2006; Juhmani, 2014) there is no significant relationship between profitability and environmental disclosure.
Despite getting so much positive relation, Makni et al. (2009) showed a significant negative impact of environmental accounting disclosure on three financial performance measurement variables, namely ROA, ROE and market returns. Freedman and Jaggi (1988) haven’t found any statistically significant relationship between the extent of pollution disclosures from four highly polluting industries, namely chemicals, steel, oil, paper and economic performance of those companies in the USA. But, a significant positive relationship has been detected when the sample is stratified based on industry group.