Sustainability Risk Disclosure Practices of Listed ...

Sustainability Risk Disclosure Practices of Listed Companies in Australia John Dumay

, Macquarie University

MD Amir Hossain, Macquarie University This paper investigates the extent to which the top 100 ASX listed companies disclosed economic, environmental and social sustainability risk factors during the 2014/15 financial year in light of the changes introducing Recommendation 7.4 to the third edition of the Corporate Governance Principles and Recommendations in 2014. While all companies complied with the Recommendation, questions of substance over form were raised because some companies had risks that were not disclosed according to Recommendation 7.4. Our conclusion outlines how this research contributes to the growing literature on sustainability and corporate governance. We add to the continuing debate on mandatory versus voluntary disclosures, advocating that Australia may need to introduce mandatory guidelines, beyond the ASX, to regulate the disclosure of material economic, environmental and social risks. Additionally, we conclude that Recommendation 7.4 is unlikely to substantially change Australian corporate reporting and disclosure practices – that, for most companies, it is ‘business as usual’. However, under business as usual, we can naturally expect to see further increases in sustainability and alternative reporting frameworks, such as integrated reporting, as well as increasing use of the Internet to report and disclose sustainability risks.

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hanges in social, environmental and economic arenas are redefining the paths by which global corporations are conducting business (Global Reporting Initiative (GRI) 2013), and communicating salient information about these pressing issues is becoming ever more vital to stakeholder relations (Staden and Hooks 2007; Herbohn et al. 2014; Klettner et al. 2014). Today, economies are interwoven (Galbreath 2013). Globalisation, coupled with continuously changing political scenarios, is causing significant shifts in the world’s use of resources and consumer behaviour. Dealing with these shifts to minimise long-term impacts is one of the principal challenges currently facing organisations (World Business Council for Sustainable Development 2004). Sustainability grounds the development debate, especially in a global framework where the ‘continuous satisfaction of human needs constitute the ultimate goal’ (Brundtland 1987). According to Brundtland (1987), sustainable development is ‘development that meets the needs of the present world without compromising the ability of future generations to meet their own needs’ (p. 8). In the corporate world, this translates to meeting the needs of stakeholders without diminishing returns to future stakeholders (Dyllick and Hockerts 2002). Sustainability risk reporting is a key avenue for providing stakeholders with the information they need to evaluate a company’s operations.

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Three conditions have to be met for a company to be considered sustainable. First, it must be economically sound. Second, its operations must have minimal negative impact on the environment, and third, it must comply with the social norms and expectations of society. Gray (2006) asserts that, given these conditions, it is unlikely that any company is truly sustainable. Under significant pressure from new regulatory frameworks, emerging business models are incorporating concerns for the environment, society and governance to foster legitimately sustainable business practices (Buhr 1998; Deegan et al. 2002; Dumay et al. 2015). One such framework is the third edition of the Corporate Governance Principles and Recommendations (the Principles). The third edition came into effect in 2014 (ASX CGC 2014) and, among the changes, Recommendation 7.4 was introduced to guide the broad practices surrounding sustainability risk reporting by listed Australian companies – specifically, economic, environmental and social disclosures. The Recommendation marks a shift towards greater stakeholder involvement in

Correspondence: John Dumay, Department of Accounting and Corporate Governance, Faculty of Business and Economics, Macquarie University, NSW 2019, Australia. Tel: +61 2 9850 7111; email: [email protected] Accepted for publication 3 March 2018. doi: 10.1111/auar.12240

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Sustainability Risk Disclosure

corporate governance, and its introduction is the main motivation behind this study. Companies that engage in sustainability risk reporting normally do so on a voluntary basis. Publicly traded companies in Australia are not required to follow the Principles. Boards have discretionary power to ignore the guidelines if, for example, they deem the Council’s recommendations to be inappropriate for their circumstances, but they must explain their decision on an ‘if not, why not’ basis (ASX CGC 2014: 3). However, because companies are required to issue an Appendix 4G report outlining why they did or did not comply with the Principles, one might argue that sustainability risk reporting for ASX listed companies is more mandatory than voluntary. Thus, we refer to complying with the Principles as quasi-mandatory. In this context, it is interesting to examine whether companies merely complied, or substantively disclosed, their risk information. Using content analysis, the documents crossreferenced in Appendix 4G statements, such as annual reports, standalone sustainability reports, corporate governance statements, annual reviews and web disclosures, were measured and analysed to determine the extent of the economic, environmental and social sustainability risk reporting and disclosure made by listed Australian companies during the 2014/15 financial year (FY). This was the first full reporting period after the changes came into effect. The research results establish that all companies complied with Recommendation 7.4, although some disclosures raise questions of substance over form. Additionally, all companies disclosed their sustainability risks, with the exception of Domino’s Pizza Enterprise Ltd. Annual reports were the main medium of disclosure, followed by sustainability reports, websites, annual reviews and corporate governance statements, in that order. The financial sector disclosed the most overall, as well as the most words and the most narratives; the IT sector hardly disclosed at all. Non-sensitive industries tended to publish more economic disclosures, whereas sensitive industries tended to publish more social and environmental disclosures. Last, we found that firm size is positively related to sustainability risk disclosure, with larger firms disclosing more sustainability risk information than smaller firms. Empirically, our research adds to the growing body of literature that recognises good governance and sustainability are not mutually exclusive and cannot be separated (Galbreath 2013: 530). Moreover, the analysis provides novel evidence of the impact of the ASX’s new sustainability reporting guideline, Recommendation 7.4, on the corresponding sustainability risk disclosure practices of Australian listed companies from a corporate governance perspective. Significantly, we agree with Deegan and Gordon (1996), who argue that voluntary disclosure is not sufficient to govern the environmental 2

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disclosure practices of Australian companies, as it does not fulfil the demands of stakeholders. We present evidence from the business press about the companies who claim they complied, yet had obvious risks; their nondisclosure supports this finding. Thus, we also sustain the debate between the need for mandatory versus voluntary disclosure. The debate is important because of an international push to disclose more of the financial risks associated with social and environmental change (e.g., IIRC 2013; GRI 2014; TCFD 2016). Practically, we find that reporting and disclosing sustainability risks appears to be ‘business as usual’ for all the ASX companies in our sample, given they already comply with the ‘if not, why not’ approach. Specifically, we could not find any evidence to argue that there was a substantiative change in the way companies report. However, the business-as-usual finding does anticipate changes in reporting and disclosure practices since there is always a hot new reporting trend, and companies typically want to display themselves at the forefront of business practice. Thus, changes to sustainability reporting guidelines or new frameworks, such as integrated reporting, may motivate more companies to comply with the Recommendation in future. In short, ‘business as usual’ means we can expect the continued use of annual reports, alongside changed and new reporting frameworks, and increased internet disclosures. Literature Review Sustainability risk is a rapidly evolving issue, both globally and locally. Organisations are feeling a growing need to practice their business sustainably to ensure their future survival, and investors are becoming increasingly aware of the financial risks associated with companies that do not proactively manage their exposure (Task Force on Climate-related Financial Disclosures (TCFD) 2016). This review focuses on the evolution and importance of social, economic and environmental sustainability risk disclosures and concludes with the central research question of this study. Sustainability risk and reporting Sustainability is one of the most cited terms this century (Dyllick and Hockerts 2002). From a corporate perspective, sustainability is how a firm grows and develops their recognition of environmental, social and economic issues (Yilmaz and Flouris 2010). In Dyllick and Hockerts’ (2002) terms, this means corporations must meet their current objectives without diminishing their ability to meet the needs and demands of future stakeholders. However, while it is important to practice sustainability, it is also important to disclose sustainability risks to investors and other prominent stakeholders. C

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Over time, corporate disclosures have evolved from solely disclosing economic risk to also disclosing social and environmental risk. According to Benn et al. (2006), vocal human rights activities, environmental awareness, the green movement and worldwide consensus are raising increasing concerns about the fair treatment of social and environmental measures – and the risks associated with these concerns are driving corporate sustainability practices. Holliday (2001) concurs, outlining that managers recognise sustainability as a precursor for conducting and legitimising their businesses. Economic sustainability is no longer enough because it does not ensure a company’s future success (Dyllick and Hockerts 2002). Rather, it requires a holistic approach that embraces all three dimensions of sustainability. Today, companies can only be considered sustainable if: their operations have no negative impact on the environment; they match the expectations of society; and they are financially sound. However, there is no evidence to suggest that any company has achieved all three outcomes. Christofi et al. (2012) emphasise that growing pressure to regulate social justice, economic growth and environmental change has led to an evolution in corporate sustainability risk management practices and reporting. Similarly, Dyllick and Hockerts (2002) outline that many companies now employ specialists to create and maintain sustainability practices. They address sustainability risks in their business strategies and issue sustainability performance reports on how well they achieve these strategies. Overall, sustainability risk has also found a spotlight in corporate governance practices. The corporate collapses and widespread instability resulting from the GFC have provoked concern across financial markets worldwide (Abraham and Shrives 2014). Prominent among these concerns are criticisms of inaccurate and inadequate corporate disclosures about governance practices, particularly those relating to social, environmental, and economic risk. According to Abraham and Shrives (2014), shortcomings in disclosure impact an investor’s ability to fully assess information about public companies and their associated risks. However, even though there is a general consensus on the need for effective risk management and its disclosure, there is less agreement on how, and to what extent, environmental, social, and economic sustainability risk should be disclosed. In response, several corporate governance guidelines now include recommendations that advise listed companies to report on their economic, social and sustainability risks (e.g., ASX Corporate Governance Council (ASX CGC) 2014; Institute of Directors in Southern Africa (IoDSA) 2016). For example, the King IV guidelines require listed South African companies to expand their risk disclosure much further than was previously required under the King III guidelines of 2009 in light of changing weather conditions and the pressure on population C

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and natural resources. In Australia, the third edition of the Principles incorporates a new sub-Section 7.4, which states that ‘A listed entity should disclose whether it has any material exposure to economic, environmental and social sustainability risks and, if it does, how it manages or intends to manage those risks’. Additionally, with the issuing of a report by the Financial Stability Board, there is renewed pressure on companies in Europe to specifically disclose climate-related financial risks because ‘it has been difficult for investors to know which companies are most vulnerable to climate change, which are best prepared, and which are taking action’ (TCFD 2016: i). Thus, disclosing all forms of sustainability risk is high on the international agenda, and is also evidenced by the emerging risk accounting, reporting and disclosure literature (e.g., Abdelrehim et al. 2017). From reporting to disclosure: A departure Reporting and disclosure are different, although the terms are mostly used synonymously. As Dumay (2016: 178) outlines, disclosure is: ‘the revelation of information that was previously secret or unknown’, while reporting is a ‘detailed periodic account of a company’s activities, financial condition, and prospects that is made available to shareholders and investors’. In this context, disclosures are more useful than reports because investors are always looking for more timely and relevant information, especially if it is secret or unknown. In response, and with the help of technology, many organisations are increasingly using the Internet to disclose sustainability risk information (Unerman et al. 2007; Guthrie et al. 2008). The web is a useful medium for communicating social, environmental and economic information to stakeholders since disclosures can be made in real time and in an interactive way, as opposed to periodic unidirectional reporting (Lodhia 2006, 2010). Prior researchers have integrated online data sources into their studies, claiming that corporations use web disclosures for prompt engagement with stakeholders (Adams and Frost 2004; Patten and Crampton 2004; Frost et al. 2005; Lodhia 2005; Cho et al. 2009). Given that disclosure is more relevant than reporting, the research question of this paper becomes: RQ: To what extent do companies disclose social, environmental and economic sustainability risk information?

ASX Corporate Governance Principles and Recommendations To answer this question, we next explore the context of the ASX Corporate Governance Council’s Recommendation 7.4, which calls for the reporting of economic, Australian Accounting Review

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social and environmental risks. We have used this Recommendation because it is a quasi-mandatory reporting requirement for Australian listed companies. No legal sanctions are placed on companies that do not comply with the Recommendation, but they must file an Appendix 4G report outlining whether or not they have complied on an ‘if not, why not’ basis (ASX CGC 2014: 3). Additionally, we are Australian researchers and are therefore taking the opportunity to research the impact of implementing Recommendation 7.4. The ASX Corporate Governance Council first published the Principles in 2003 to ensure listed entities practice sound corporate governance in keeping with the reasonable expectations of shareholders (ASX CGC 2014). The ASX states that companies should explain their corporate governance approach to help stakeholders develop a meaningful dialogue with the board and management on governance matters, exercise their votes on particular matters and make meaningful investment decisions (ASX CGC 2014: 3). A second edition of the Principles was published in 2007, and a third edition, prompted by investor misgivings resulting from the GFC in 2008–12, became effective from July 2014. These Principles are now considered to be the yardstick of good corporate governance in Australia (KPMG 2014). In part, the third edition of the Principles aims to provide greater flexibility to Australian listed entities by giving companies the option to adopt different corporate governance practices based on their size and composition. More specifically, this edition aims to maintain and protect investor confidence in the market (ASX CGC 2014). Realising the significance of disclosures about sustainability risk, Recommendation 7.4 was included as one of the changes. Recommendation 7.4 encompasses all three dimensions of sustainability – environmental, social and economic – and this change forms the primary basis for examining the disclosures made by listed companies in the 2014/15 FY in this paper. According to the Principles, environmental sustainability is ‘the ability of a listed entity to continue operating in a manner that does not compromise the health of the ecosystems in which it operates over the long term’ (ASX CGC 2014: 37). This definition is in keeping with Brundtland (1987) who argues that population growth, coupled with unrestrained consumption, increased pollution and the depletion of natural resources, endangers ecological integrity. As a consequence, companies are urged to consider sustainability and operate in keeping with environmentally responsible principles (Shrivastava 1995). Social sustainability is defined as ‘the ability of a listed entity to continue operating in a manner that meets accepted social norms and needs over the long term’ (ASX CGC 2014: 38). To be a socially sustainable enterprise, 4



Gladwin et al. (1995: 42) asserts that a firm needs to reduce social costs, maintain and grow its capital stock, foster democracy, and distribute resources and property rights fairly. Economic sustainability is defined as ‘the ability of a listed entity to continue operating at a particular level of economic production over the long term’ (ASX CGC 2014: 37). From an economic point of view, sustainability means maintaining the well-being of society over a period on a continuous basis (Arrow et al. 2004). Although Australian listed companies may choose any corporate governance guidelines based on their composition, ASX guidelines require that every listed company must include a corporate governance statement in either their annual report or as a link on their website (ASX CGC 2014) in addition to the ‘if not, why not’ approach (ASX CGC 2014: 3). The quasi-voluntary nature of the Principles brings further context to our research question – the extent to which companies disclose sustainability risk information – and a focus on the disclosures made under Recommendation 7.4 to our analysis. Research Design and Methodology To measure the extent of sustainability risk disclosures, we used content analysis to categorise each disclosure according to the type of risk – whether economic, environmental or social. Then, we measured the number of disclosures in each category and the extent of both the narrative and visual disclosures. The sample, corpus and period under analysis The top 100 ASX listed companies as of 20 July 2016 are the sample. These companies represent approximately 74% of the total Australian share market capitalisation.1 The ASX mandate to prepare a completed Appendix 4G is the key to finding the required company disclosures (ASX CGC 2014: 5). These 4G statements for the first full reporting period post the introduction of Recommendation 7.4 (1 July 2014–30 June 2015) along with the referenced documents they contain, such as annual reports, corporate governance statements, sustainability reports, company websites and annual reviews, formed the corpus of documents and data for our analysis. If an essential document could not be located, a request was emailed to either the ASX or the company. Ultimately, the sample of 100 firms was reduced to 97. Two companies were excluded because they were established after the 2014/15 FY ended. Another firm was excluded because their reports were published to meet the reporting criteria of the US Securities Exchange Commission. C

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Table 1 Industry classifications Industry sector Consumer discretionary Consumer staples Energy Financials Healthcare Industrials Information technology Materials Telecommunications Utilities Total

Number of companies

Percentage

12 5 5 27 9 12 2 17 3 5 97

12% 5% 5% 28% 9% 12% 2% 18% 3% 5% 100%

Content analysis and classification Content analysis is designed to reveal the ‘hidden meanings in text’ (Krippendorff 2013: 24). Further, it is ‘a method of collecting data, and it includes coding qualitative and quantitative data into pre-defined themes to infer designs in the presentation and reporting of data’ (Guthrie et al. 2004: 287). Our three main themes – economic, environmental and social sustainability risk – were established using the definitions in Recommendation 7.4 with no subsets to reduce subsequent coding errors. For example, the carbon tax was judged to be an economic sustainability risk, but the volume of carbon dioxide/greenhouse gas emissions was judged to be an environmental sustainability risk. Disclosures deemed mutually exclusive were coded as combined disclosures because separating words from sentences can misrepresent their meaning (Krippendorff 2013: 84). In addition to subjective insights into the text, content analysis also provides opportunities for further analysis using a suitable research methodology that includes both qualitative and quantitative methods. Firm size, industry sector and industry sensitivity were established as the criteria for deeper analysis. The Global Industry Classification Standard (GICS)2 was used to divide the sample into 10 industry sectors (see Table 1). Firm size was determined by capitalisation and net assets book value. Industry sensitivity was based on whether the industry has a direct physical impact on the environment. Coding and validation Each disclosure was then coded according to its disclosure category, industry classification and type (narrative or visual) using NVivo Pro 11. Following Krippendorff (2013: 270–71), a reliable coding framework with decision rules was established to ensure consistency in the data analysis. To ensure reproducibility, coding agreement was reached through consensus of the authors. To cross-check the validity of the results, ex-post facto research was conducted by comparing internal documents C

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with external reports (Dumay and Cai 2015) from the Factiva3 database – a repository of news, articles and analysts’ reports. The research findings were also compared with relevant previous research.

Unit of analysis Companies publish disclosures in one of two ways: as narratives or as images (charts, tables, pictures, etc.). Selecting the unit of analysis for measuring disclosures in social and environmental accounting is an important stage of content analysis. Although there are different standard units of analysis, such as words, sentences, pages, disclosure indices, etc., they are highly associated with each other (Hackston and Milne 1996) and, in the context of this study, the chosen unit of analysis is unlikely to affect the results (Deegan et al. 2002). In our study, words were used as the unit of measure for narrative disclosures, and pixels were used for visual disclosures. Using words to measure narratives is robust since the best way to maximise robustness to errors is to measure using the smallest unit of analysis (Deegan and Gordon 1996: 189), which, in this case, is words. Additionally, given ‘quantitative disclosures are more objective and informative to stakeholders than qualitative information’ (Al-Tuwaijri et al. 2004: 454), it makes sense to apply the same logic to this paper’s disclosures for readers. In calculating the number of words, we adopted both Frost (2007) and Zeghal and Ahmed’s (1990) mixedusage approach to reading ‘whole sentences and logical parts of sentences’ and counting the words with some changes. For example, ‘$50,000 was invested in Project A’, is counted as six words and coded as monetary (Zeghal and Ahmed 1990: 42). They argue that this approach provides a more detailed description of the content; however, the nature of their study was exploratory. Instead, we considered the narrative risk exposures as sentences, followed the classification scheme, and then counted the words. Companies traditionally use images in conjunction with narratives to convey performance information, such as incident rates, health and safety performance, waste performance, carbon emissions data, water usage, etc. Unerman (2000: 675) argues that images cannot be measured in words or sentences because of their subjectivity (Wilmshurst and Frost 2000: 17; Guthrie et al. 2004: 290). However, simply ignoring the contents of these disclosures due to difficulties with a measuring scale would not allow a comprehensive analysis (Al-Tuwaijri et al. 2004: 454). Thus, pixels were used to measure the images as another quantitative unit of evaluation. We relied on NVivo Pro 11 software throughout the process to code the text, count words and measure the extent of the visual disclosures. Australian Accounting Review

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Results and Discussion This section presents the results of data analysis in support of the research question along with a discussion on the key insights and observations in each of the analyses we conducted. We examine compliance, the medium of disclosure, the type of sustainability risk disclosure, disclosures by industry, disclosures by industry sensitivity, and the relationship between firm size and disclosure practices. Compliance Our analysis reveals that 96 of the 97 companies disclosed at least one form of sustainability risk information. However, while all companies complied, a question arises as to whether they provided substantial information. According to stakeholder theory, corporations are accountable for providing their social and environmental performance information to stakeholders (Gray et al. 1996). In response, companies disclose their nonfinancial information to a wide range of stakeholders (O’Donovan 2002; Clarkson et al. 2008; Matsumura et al. 2014). The concept of ‘substance over form’ emphasises that economic realities must take precedence over legal requirements when reporting any phenomenon. But this also sparks debate about whether disclosure regulations should be specific or left to the discretion of management (Frost 2007). Frost (2007) argues that mandating specific requirements might limit the number and nature of disclosures, whereas voluntary reporting gives companies more flexibility about which information they disclose and when they disclose it. He adds that complex regulatory mandates may even tempt managers to disclose less information, as disclosures may lead to compliance with even further requirements. Kershaw (2005), a critic of rules-based standards, points out that specific mandates can become impractical and, at times, dysfunctional when the surrounding economic environment changes. He argues that managers may even produce fictitious transactions to exhibit apparent compliance while ignoring the economic substance of many issues that are more material to stakeholder decisions. The Enron Corporation is a classic example of where a company conformed to specific SEC requirements, yet ignored the economic reality of many of its transactions and was finally forced to file for bankruptcy. Domino’s Pizza Enterprise Ltd (Domino’s) and Medibank Health Care Ltd (Medibank) acknowledged risks without disclosing specific information about what those risks were. IOOF Holdings Ltd (IOOF), Perpetual Ltd and Primary Health Care Ltd (Primary Health) disclosed risk in some categories but not others. And, Primary Health and IOOF disclosed either social or economic 6



sustainability risk information but did not acknowledge doing so in their Appendix 4G report, which may have been due to a lack of internal communication on the part of the statement preparers. In this context, and given that complying with Recommendation 7.4 is voluntary, it is interesting to examine whether companies simply complied, or substantively disclosed, their risk information. The analysis reveals five companies who should have disclosed information under the Recommendation and did not. Domino’s claimed compliance but was the only company that did not disclose any sustainability risk information to its stakeholders. Its annual report even notes, ‘The Consolidated entity is not subject to any significant environmental regulation or mandatory emissions reporting and does consider that it has material exposure to economic, environmental and social sustainability risks’ (Domino’s 2015: 16). However, a cross-check of the Factiva database located a Herald Sun news article, ‘Roll out the Dough: Domino’s Pay Pain’ that exposes questionable policies surrounding wage penalty rates (Whalley 2016). In the article, Michael Simotas of Deutsche Bank Analysts states, ‘if Domino’s were to pay penalties in line with the industry award, the group’s Australian wage bill would likely blow out 14 per cent’. In economic terms, being forced to comply with the award would result in a significantly decreased bottom line. Socially, Domino’s franchisees risk being seen as underpaying or exploiting their staff. No media reports on Domino’s environmental risks were found, and it is beyond the scope of this analysis to verify their internal practices; however, common sense dictates that several aspects of their operations carry the potential for environmental risk and warrant either positive or negative disclosure, for example, the use of genetically modified food, operating a large fleet of carbon-emitting vehicles, refrigerants used in food transport/storage, waste management, etc. Medibank claimed compliance by stating it ‘did not identify any material exposures to environmental or social sustainability risk’ (Medibank 2015: 22) with no further explanation. However, an article in The Sydney Morning Herald contradicts this claim, revealing that Medibank was the subject of 1775 (40.2%) of the complaints received by The Private Health Insurance Ombudsman in 2015–16. The insurer had an embarrassing year, including a legal battle with the Australian Competition and Consumer Commission over slashing coverage without notifying policyholders, an IT bungle that delayed its distribution of tax statements and a public beating by consumer group Choice, which described some policies as ‘junk’. (Han 2016). Members quit the insurer at higher than average industry rates amid scandal and embarrassment, sending numbers backwards by 100 000 to 3.8 million members, and Medibank’s CEO said they expected to lose even more market share this C

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year (Han 2016). The article goes on to conjecture that a high ratio of complaints usually indicates either an inadequate dispute resolution process or systemic policy issues. Even without substantiation, such negative media exposure constitutes economic and social risk exposure that Medibank did not disclose. Our research did not reveal any information about Medibank’s environmental sustainability risks, but similar companies in the same industry, such as Ramsay Health Care and Ansell, did make environmental disclosures. IOOF disclosed some information about some economic and social sustainability risks, but it did not disclose that it had been accused of ‘serious misconduct by senior staff including insider trading, front running, misrepresentation of performance figures, and cheating on training and compliance exams’ (Ferguson and Danckert 2015). After Fairfax media reported the news, IOOF’s share price fell by about 21%. IOOF should have reported its misconduct and compliance issues to the relevant regulatory agency and disclosed its economic risk exposure to stakeholders, but IOOF kept this information in-house. IOOF provides financial services to its clients and, due to the nature of its business, IOOF claims to have no direct relationship with the physical environment resulting in environmental risk. However, as a business, the company uses water and electricity which creates carbon dioxide, and it produces waste that can either be dumped or recycled. No information about these issues was disclosed. IOOF may not consider these issues to be material threats to the organisation, but other companies in the same industry, such as Westpac, ANZ, NAB and QBE, made substantive disclosures about environmental sustainability, including the volume of greenhouse gases generated by their operations and the amount of waste they produce. For example, in 2015, ‘QBE included green bonds in its investment portfolio to improve environmental outcomes while generating appropriate risk-adjusted returns’ (QBE Insurance Group Limited 2016: 3). Harvey Norman, a household goods and electronics retailer, did not disclose any social sustainability risk information to stakeholders but stated its compliance with the Recommendation in their Appendix 4G. A Factiva database search discovered a news article titled ‘Harvey Shrugs Off Salary Protests’ (John 2014) reporting Harvey Norman’s intention to ignore a shareholder vote against the company’s proposed pay structure for the chairman and senior executives. Ignoring shareholders constitutes a social risk that was not disclosed and can significantly affect the company’s bottom line if shareholders withdraw their capital. Primary Health states in its corporate governance statement: ‘Primary does not have any material exposure to economic, environmental and social sustainability risks under the ASX Recommendations. Primary’s C

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operations are highly regulated . . . each division operates under a range of policies which provide guidance in relation to identifying and responding to risk’. But, curiously, Primary Health’s annual report does disclose some social risk information. It also contradicts some of the company’s claims about regulation: ‘The operations of the Group are not subject to any site-specific environmental licences or permits which would constitute particular or significant environmental regulation’ (Primary Health Care Limited 2015: 33). Primary Health goes on to pledge its commitment to ‘managing operations in an environmentally sustainable manner to maximise resource efficiency in relation to the consumption of energy and natural resources and minimise waste’, indicating its awareness that environmental sustainability risks exist. Other news articles reveal evidence of economic risk that Primary Health did not disclose. Under pressure from the Australian Securities and Investments Commission (ASIC), Primary Health amortised $426.2 million in goodwill in the first half of the 2014/15 FY (King 2015) through questionable accounting practices and valuations without holding that value in reality. The web of confusion around these contradictory statements and the company’s lack of disclosure regarding key economic risks indicate that Primary Health may either lack understanding of what sustainability means, or it did not properly coordinate the preparation of its corporate governance statement and annual report. These five companies serve as paragons of legitimacy theory’s failure to educate stakeholders about a company’s actual practices. Reports about hidden company information, like wage scandals, junk policies and bonuses for over-servicing, that are published by external parties in prominent national news media, such as The Sydney Morning Herald, the Sun Herald and The Australian Financial Review, are typically against the will of the company management and generally have negative consequences. Involuntary disclosures are not like periodic, regulated disclosures; they originate from stakeholder motivations to reveal the hidden information in an organisation either for their own benefit or from a sense of responsibility to society. Dumay and Guthrie (2017: 11) define involuntary disclosure as ‘what external stakeholders and stakeseekers4 disclose about a company’. Involuntary disclosures create opportunities and threats to an organisation, which can significantly affect their share price and reputation (Dumay and Guthrie 2017). Arguably, a pro-active organisation can create value by better complying with the substance of risk disclosure than allowing involuntary disclosures to impact their legitimacy. However, many involuntary disclosures expose the wrongdoings of managers. And they are unlikely to disclose the information because it would immediately have a negative impact on their organisation’s share price. Thus, mandated disclosures may need to be Australian Accounting Review

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Table 2 Sustainability risk disclosure mediums Medium of disclosure Annual reports Sustainability reports Websites Annual reviews Corporate governance statements Total

Words

Percentage

282 912 161 808 62 157 25 673 10 245 542 795

52% 30% 11% 5% 2% 100%

Table 3 Coding incidences of sustainability risk disclosure Coding references

Total

Percentage

Annual reports Sustainability reports Websites Annual reviews Corporate governance statements Total

1453 1074 460 195 72 3254

45% 33% 14% 6% 2% 100%

Table 4 Economic, environmental and social sustainability risk disclosure Sustainability disclosure category

Narratives (words) Percentage

Economic Environmental Social Combined Total

211 131 173 800 139 420 18 444 542 795

39% 32% 26% 3% 100%

Visuals (pixels)

Percentage

13 300 773 77 171 306 21 766 136 2 546 930 114 785 145

12% 67% 19% 2% 100%

accompanied by stiffer penalties for managers and directors who circumvent regulations and continue to conceal information from shareholders and other stakeholders. Disclosures by medium Annual reports were the companies’ most popular medium for sharing sustainability risk information with their stakeholders at 52%; corporate governance statements were the least popular (2%). Table 2 provides a full breakdown of disclosures by medium. Table 3 lists disclosures according to disclosure source. From these tables, we conclude, based on abductive reasoning, that there is a logical relationship between the volume and the source of the sustainability risk disclosures as they appear in the same order. Table 4 lists the word counts for narrative disclosures and the pixel counts for visual disclosures. Economic risks were most commonly disclosed through narratives, but environmental issues dominated visual disclosures at more than triple the rate of the next closest category (67%). It is also interesting that, when divided into financial (economic) and non-financial categories (social and environmental), non-financial disclosures were more dominant than financial disclosures. 8


These results concur with previous researchers, who also identified the annual report as the most significant medium for disclosing social and environmental information (Deegan et al. 2002; Guthrie et al. 2004; Guthrie and Abeysekera 2006; Cho and Patten 2007). Publishing an annual report is required by legislation in many jurisdictions (Tilt 2001) and, in Australia, every listed company is required to submit its annual financial reports to the ASX at the end of the financial year under listing rule 4.10.3 (ASX CGC 2014: 5). Hence, companies find these reports a convenient way to disclose both their financial and sustainability risk information to stakeholders. Further, De Villiers and Van Staden (2011) determine that firms with poor environmental performance disclose more voluntary information in their annual report to reduce information asymmetry and offset the potential for resulting losses. Additionally, O’Donovan (2002) finds that Australian companies disclose environmental information in annual reports more to gain, maintain and repair their legitimacy within the expectations of social norms. Sustainability reports are the second most preferred medium of communication, with almost 40% of companies (37) using them to report some form of sustainability risk information. According to a corporate social responsibility study by Herbohn et al. (2014) that examined annual reports, sustainability reports, and online databases to measure sustainability disclosure and performance, companies use sustainability reports to provide further information about the factors relating to their sustainability risks, such as how to mitigate those risks to sustain their business in the short, medium and long term. Our analysis supports these findings for large companies. However, we found smaller firms were less likely to produce standalone reports due to economies of scale and the nature of their business. For instance, QBE Insurance Ltd (QBE) appeared to target its reports to specific audiences. QBE’s annual report contained economic risk information, while social and environmental risk information was solely disclosed through a sustainability report. According to the positive branch of stakeholder theory, the stakeholders that control the most critical resources of a company require information beyond financial statements, such as social and environmental information. Therefore, QBE may have separated its sustainability risk information to meet the expectations of these powerful stakeholders. Twenty-eight companies disclosed sustainability risk information on their websites but most used them to provide further explanations about the disclosures in more traditional reporting mediums. Given traditional reports are usually produced annually, they are not able to reflect the current conditions of the company, whereas websites provide an immediacy of communication to stakeholders. De Villiers and Van Staden (2011) C

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Table 5 Sustainability risk disclosure by industry sector Industry sector Consumer discretionary Consumer staples Energy Financials Healthcare Industrials Information technology Materials Telecommunications Utilities Totals

Narrative (words)

Mean

Percentage

Images (pixels)

Mean

Percentage

22 679 23 905 37 893 183 876 28 506 49 753 3167 151 999 9624 31 393 542 795

1890 4781 7579 6810 3167 4146 1584 8941 3208 6279 5596

4% 4% 7% 34% 5% 9% 1% 28% 2% 6% 100%

4 360 246 4 605 889 7 033 724 49 741 154 2 046 153 16 433 511 282 270 25 194 173 2 687 546 2 400 479 114 785 145

363 354 921 178 1 406 745 1 842 265 227 350 1 369 459 141 135 1 482 010 895 849 480 096 1 183 352

4% 4% 6% 43% 2% 14% 0.25% 22% 2% 2% 100%

examine the discretionary behaviour of management according to the medium of disclosure and find that companies use website disclosures when they experience environmental disasters, but use annual reports when they have a long-term environmental reputation crisis. Additionally, some companies, such as Lendlease Ltd, Scentre Group Ltd, AGL Ltd and Asciano Ltd, have very large datasets, which they disclose on their websites for convenience. Annual reviews and corporate governance statements were less commonly used. Annual reviews form part of a suite of integrated reporting tools, where the focus is on a range of sustainability risk information supported by concise financial performance information (International Integrated Reporting Council (IIRC) 2013). Corporate governance statements were mostly used by small companies, which may be due to economies of scale or because annual reviews are a convenient way to publish sustainability risk information and governance issues simultaneously. Disclosures by type Economic sustainability risk information accounted for the most disclosures among the sampled companies, followed by environmental and social information. However, the prevalence of economic disclosures may be due to the predominance of financial companies in the sample (27 of 97; 28%). Economic disclosures accounted for 38% of the total narratives and 12% of the total images. From this analysis, it is evident that companies are more concerned about their economic sustainability risks than their environmental and social sustainability risks. By their nature, economic disclosures are more narrative than graphic, and this is reflected in the results. The sampled companies disclosed more about their regulatory risk, price volatility, exchange rate risk, interest rate risk and operational risk as narratives since these factors are more descriptive than calculative. Environmental information was the second most disclosed type of sustainability risk. Overwhelmingly, C

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companies portrayed their environmental sustainability risk information visually at 67% (77.2m pixels) of the total visual disclosures, accompanied by narratives that accounted for 31% (169.7k) of the total words. This may be because communicating environmental factors, such as carbon emissions, waste recycling, water usage and contamination, rehabilitation of land and green initiatives, are particularly suited to disclosure through images. Graphs, figures and pictures easily capture the attention of readers and ‘a picture tells a thousand words’ (Unerman 2000; Wilmshurst and Frost 2000). On average, the sampled companies disclosed 1.7k words and 0.8m pixels. Social information accounted for the least proportion of narrative disclosures (134.1k words; 25%) but was the second highest category of visual disclosure (21.8m pixels; 19%). Disclosures by industry Total disclosures Table 5 shows that the financial sector disclosed the most sustainability risk exposure with 34% of the total narrative disclosures and 43% of the total visual disclosures. Information technology disclosed the least with only 1% of the total narratives and 0.25% of the images. Economic disclosures Table 6 shows the industry analysis for economic disclosures. It is perhaps unsurprising that the financial sector claims credit as the highest discloser of economic risk in both narratives (107.1k words; 51%) and visuals (1.07m pixels; 81%). Finance has more exposure to economic risk than social and environmental risk since its main operations are related to financial activities. Further, 28% of the sampled companies are financial companies, and, given they tend to be more concerned about the economic aspects of their business, their level of economic disclosure was significantly higher than the other types. Australian Accounting Review

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Table 6 Economic sustainability risk disclosure Economic disclosures Industry sector Consumer discretionary Consumer staples Energy Financials Healthcare Industrials Information technology Materials Telecommunications Utilities Total

Words

Mean

Percentage

Pixels

Mean

Percentage

9368 6129 9657 107 122 9808 9168 1900 45 739 2268 9972 211 131

781 1226 1931.4 3967 1090 764 950 2691 756 1994 2177

4% 3% 5% 51% 5% 4% 1% 22% 1% 5% 100%

0 384 507 202 673 10 735 755 282 643 165 220 0 628 907 0 901 068 13 300 773

0 76 901 40 535 397 621 31 405 13 768 0 36 995 0 180 214 137 121

0% 3% 2% 81% 2% 1% 0% 5% 0% 7% 100%

Table 7 Environmental sustainability risk disclosure Environmental disclosures Industry sector

Narrative (words)

Mean

Percentage

Images (pixels)

Mean

Percentage

8468 9541 14 112 40 998 10 102 18 542 1031 57 332 3955 9719 173 800

706 1908 2822 1518 1122 1545 516 3372 1318 1944 1792

5% 5% 8% 24% 6% 11% 1% 33% 2% 6% 100%

3 435 364 2 643 803 4 039 049 33 789 345 942 565 11 953 495 282 270 16 889 133 2 062 560 1 133 722 77 171 306

286 280 528 761 807 810 1 251 457 104 729 996 125 141 135 993 478 687 520 226 744 795 580

4.5% 3.4% 5.2% 43.8% 1.2% 15.5% 0.4% 21.9% 2.7% 1.5% 100.0%

Consumer discretionary Consumer staples Energy Financials Healthcare Industrials Information technology Materials Telecommunications Utilities Total

However, the lack of disclosures by the information technology and telecommunications industries is surprising considering they are volatile industries, especially from an economic perspective. Notably, several industries, including information technology, did not disclose any visual information. Environmental disclosures Thirty-two percent of the total disclosures across the sampled companies related to environmental sustainability risk. The materials industry published the greatest volume of narratives (57.3k words; 33%). In terms of images, the financial sector topped the list (3.37m pixels; 43.8%). Information technology disclosed the least environmental exposure in both words (1k; 1%) and images (0.28m; 0.4%). It is worth noting that all industries used a combination of narratives and images to disclose their environmental sustainability risks. Table 7 shows environmental disclosures by industry. The materials industry contains many extractive companies and, as such, they typically disclosed more environmental information than the other companies in the sample. This is to be expected since they have a 10


more direct physical impact on the environment. Reduced biodiversity, water contamination, land rehabilitation, carbon emissions and degraded soil quality are common concerns. Consequently, extractive companies have a great political need to maintain the legitimacy of their operations according to social norms. In kind, they disclosed more environmental information to meet the expectations of a wide range of stakeholders. Changes in governmental environmental policy, environmental regulations, industry membership requirements, major environmental incidents, bad publicity, economic performance, compliance requirements and the companies’ own policies towards the environment may also expose them to relatively more environmental risk than companies in other industries, which needs to be disclosed. Social disclosures The materials industry also disclosed the greatest volume of social sustainability risk narratives (46k words; 33%) and the most visual information (6.80m pixels; 31%), while information technology disclosed very little narrative information (0.2k words; 0.2%) and had no visual disclosures at all (see Table 8). C

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Table 8 Social sustainability risk disclosure Social disclosures Industry sector Consumer discretionary Consumer staples Energy Financials Health care Industrials Information technology Materials Telecommunications Utilities Total

Narrative (words)

Mean

Percentage

Images (pixels)

Mean

Percentage

3962 8063 12 866 25 390 8239 20 281 236 45 989 2692 11 702 139 420

330 1613 2573 940 915 1690 118 2705 897 2340 1437

2.8% 5.8% 9.2% 18.2% 5.9% 14.5% 0.2% 33.0% 1.9% 8.4% 100.0%

924 882 1 577 579 2 152 118 4 529 386 820 945 3 965 615 0 6 804 936 624 986 365 689 21 766 136

77 074 315 516 430 424 167 755 91 216 330 468 0 400 290 208 329 73 138 224 393

4.2% 7.2% 9.9% 20.8% 3.8% 18.2% 0.0% 31.3% 2.9% 1.7% 100.0%

Table 9 Sustainability risk disclosure by industry sensitivity Sensitive Sensitivity Economic Words Pixels

Combined Words Pixels Total Words Pixels

%

Pixels

Mean

%

Pixels

Mean

%

1911 48 663

35% 14%

136 595 11 402 905

2355 196 602

65% 86%

211 131 13 300 773

2177 137 121

100% 100%

2557 872 190

57% 44%

74 095 43 155 907

1278 744 067

43% 56%

173 800 77 171 306

1792 795 580

100% 100%

90 838 13 288 358 13 379 196

2329 340 727

65% 61%

48 582 8 477 778

838 146 169

35% 39%

139 420 21 766 136

1437 224 393

100% 100%

5959 1 860 262 1 866 221

153 47 699

32% 73%

12 485 686 668

215 11 839

68% 27%

271 757 2 546 930

4685 26 257

50% 100%

271 038 51 061 887 51 332 925

6950 1 309 279

50% 44%

18 444 63 723 258

190 1 098 677

100% 56%

542 795 114 785 145

5596 1 183 352

100% 100%

74 536 1 897 868 1 972 404

Again, companies with direct relationships to the physical environment and society, such as mining and industrial development companies, had concerns about hazardous working conditions, job security, low rates of pay and so on. These companies mainly portrayed their social performance information and incident information as visual disclosures, specifically health and safety, noise, community complaints and pollutants.

Sensitive vs non-sensitive industries For a deeper industry analysis, the samples were divided into sensitive and non-sensitive industries. The results of this analysis are provided in Table 9. The sensitive category includes the materials, industrials, energy and utility sectors to align with previous C

Total

Mean

Environmental Words 99 705 Pixels 34 015 399 34 115 104 Social Words Pixels

Non-sensitive

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research (Patten 2002; Clarkson et al. 2008; Dobler et al. 2015). These are high-profile industries that have a direct physical impact on the environment and society and were expected to disclose more environmental and social sustainability risk information due to the nature of their operations. This assumption proved correct. Sensitive industries accounted for almost 61% of the social and environmental disclosures – almost double that of non-sensitive industries. It is well known that extractive industries have a direct physical impact on the environment and are, therefore, likely to suffer more exposure to risks like biodiversity reduction, water contamination, land rehabilitation, carbon emissions and degrading soil quality. Consequently, extractive industries carry high political incentives to maintain the legitimacy of their business. Political theories, such as legitimacy and stakeholder theory, posit Australian Accounting Review

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that environmentally sensitive industries will disclose more environmental and social information in response to greater pressure from powerful stakeholders. Both our analysis and prior research (Deegan and Gordon 1996; Adams 2002; Patten 2002; De Villiers and Van Staden 2011) support this assertion. Conversely, consumer discretionary, consumer staples, financials, telecommunications, healthcare and information technology are considered to be nonsensitive industries with less impact on their physical environment, according to previous research (Klettner et al. 2014). Non-sensitive industries disclosed the most economic risk (65%; 2.4k words). Further, almost half of the sampled companies in the non-sensitive category operate in the financial sector (47%), which substantially influences the volume of economic disclosures. Financial organisations are more concerned about the economic aspects of their operations, and they typically focused on this in their disclosures. However, a significant number of companies also reported social and environmental risks.

Disclosure by firm size Firm size is a significant factor in disclosing sustainability risk exposures. A Pearson’s correlation coefficient (r) between firm size and narrative disclosures of 0.83 and a coefficient of determination (r2 ) of 0.70 indicates that the relationship between firm size and sustainability risk disclosures is strongly positive, with 70% of the variation in narrative disclosures predictable from firm size. Further analysis shows that this correlation is stronger within non-sensitive industries (r = 0.86 and r2 = 0.74). Hence, it is reasonable to conclude that the sensitivity of the relationship between firm size and sustainability risk disclosures depends on both economies of scale and the nature of the business. However, this relationship is not as strong for visual disclosures (r = 0.32 and r2 = 0.10). Twenty-two percent of companies did not publish any visual disclosures, and most small companies published very few disclosures overall. Larger firms disclosed a significant amount of information as both narratives and images. Political theories, such as legitimacy and stakeholder theory, also posit a positive relationship between firm size and disclosure due to greater pressure from powerful stakeholders, media attacks, political interventions, regulations and peer groups, etc. (Al-Tuwaijri et al. 2004; Clarkson et al. 2008; Herbohn et al. 2014). Larger firms are also assumed to have better economies of scale and more leverage with the media, which reduces the cost and increases the distribution of reporting (Ho and Taylor 2007). Further, agency theory posits that the larger the information asymmetry between a company and its stakeholders, the higher the agency costs. Therefore, larger firms are likely 12



to disclose more information to their stakeholders to reduce this asymmetry. The findings of this analysis support these theories and perhaps markedly so in nonsensitive industries. Conclusion This paper investigates the extent to which Australian listed companies disclosed their sustainability risk information under Recommendation 7.4 after changes to the Corporate Governance Principles and Recommendations (the Principles) came into effect in 2014. And, if they did comply, then to what extent and in which mediums did companies disclose their social, economic and environmental sustainability risks to stakeholders? If they did not comply, what explanations and/or cross-referenced documents for non-compliance did they provide in their Appendix 4G statements under the ‘if not, why not’ approach (ASX CGC 2014: 3)? The results of our analysis show that companies generally complied with Recommendation 7.4, with 96 of the 97 companies disclosing at least some form of either economic, environmental or social sustainability risk. This finding has support from a stakeholder theory perspective. However, it is clear that sustainability is an evolving issue that should not be restricted to one theory; rather, it emerges from contemporary practices of sustainability. Further, companies disclosed more economic sustainability risk than environmental or social risk, which might be due to the reduced agency costs a pro-active disclosure strategy between management and stakeholders provides (Dhaliwal et al. 2011). Empirical contributions Similar to Galbreath (2013), this research extends much of the prior research, which originally tended to focus on only one facet of sustainability. However, there is now a growing body of literature that recognises good governance and sustainability are not mutually exclusive and cannot be separated (Galbreath 2013: 530). Moreover, our analysis provides novel evidence of the impact of Recommendation 7.4 on the sustainability risk disclosure practices of Australian listed companies from a corporate governance perspective. Beyond whether or not the listed companies complied with the Recommendation, we find that, while all of the sampled companies complied, not all published substantive disclosures. The results for best-practice sustainability governance are discouraging and could be served better by mandating guidelines for sustainability risk disclosures in Australian listed companies (Frost 2007; Klettner et al. 2014). More stringent penalties for companies and managers who conceal material information may also help to ensure appropriate levels of disclosure. C

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Currently, we are not aware of any sanctions imposed by the ASX on the companies in our sample, especially those highlighted in our findings as providing only token compliance. Continuing the debate on mandatory versus voluntary disclosures is another contribution of this paper. Frost (2007) provides inconclusive evidence that companies in Australia disclosed more environmental information after the voluntary guidelines became mandatory under Section 299(1)(f) of the Corporations Act, in that some companies did disclose negative environmental information that was absent under a principles-based regime, such as environmental fines (Deegan and Rankin 1996; Gibson and O’Donovan 2007). The findings of this study, in a quasi-mandatory environment, fit somewhere between voluntary and regulated disclosure. In our case, we find that several risk disclosures had form but lacked substance. Additionally, compliance with Appendix 4G prevents the ASX from enforcing substance. Hence, we agree with Deegan and Gordon (1996) who argue that voluntary disclosure is not sufficient to govern the environmental disclosure practices of Australian companies, as it does not fulfil the demands of stakeholders. This finding is supported by evidence in the business press about the companies who claimed to have complied, yet had obvious undisclosed risks. This problem is not unique to Australia. Cross-country research in a range of settings has argued the need for compulsory guidelines on the disclosure of non-financial information to make companies more accountable to their stakeholders (De Villiers and Van Staden 2010; Klettner et al. 2014). And, according to the TCFD (2016), there is an international push of regulation to support more disclosure of the financial risks associated with social and environmental change. Thus, the debate continues, and further research needs to be undertaken. A contemporary example of mandatory legislation for reporting the social and environmental risks of listed companies is found in the European Union, which passed legislation in 2017 mandating non-financial performance reporting by organisations. The legislation emerges from Directive 2014/95/EU, which requires all European listed companies, banks and insurers with more than 500 employees to make a statement on ‘as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters’. The Directive goes on to list specific requirements, including: descriptions of the business model and corporate policies relating to such matters; policy outcomes; the principal operational risks and relevant business relationships, products or services and the company’s approach to managing those risks; and nonfinancial key performance indicators (Monciardini et al. 2016: 8–9, emphasis added). The results of this study show that Australia may need to introduce similar mandatory guidelines, beyond the C

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ASX, to regulate the disclosure of material economic, environmental and social risks. It may also be necessary to include more detailed guidelines on how reporting entities should implement and measure non-financial performance indicators to ensure the information is comparable and further assist stakeholders in gauging substance. The evidence from this research shows several clear examples of companies whose compliance is more form than substance. Given this, and a wealth of prior research, it is clear that these corporate governance guidelines should be rules-based, rather than principlesbased, to make companies more responsible for disclosing sustainability risk information of substance and to provide better transparency and accountability of corporate governance practices among Australian listed companies.

Practical contributions Practically, it is evident that economic sustainability risk exposure is the driver of disclosures in non-sensitive industries, whereas social and environmental sustainability risk exposures are drivers in sensitive industries. The results also indicate that companies still prefer annual reports as their main medium for disclosing sustainability risks to stakeholders (Guthrie et al. 2004), followed by sustainability reports, websites, annual reviews and corporate governance statements, in that order. Practically, the annual report will probably remain the primary source of sustainability risk information because, globally, all listed companies need to file some form of annual report, and there is considerable competition in the reporting landscape (Dumay 2016; Dumay et al. 2016). Additionally, reporting and disclosure requirements for companies are continually changing, and these changes do not necessarily spur companies to completely change their reporting and disclosure practices. For example, as Beck et al. (2017: 191) outline, a company’s reporting journey is framed ‘by aligning internal reflections with external outputs guided by predominant paradigms of good practice’. In this case, annual reports are the prevailing good practice, and there is ample opportunity to include narratives about risk in these reports. Thus, we see no reason for companies to radically change their current reporting practices in light of the Recommendation. Indeed, all companies complied with the ‘if not, why not’ approach, so it appears that it is ‘business as usual’ for reporting and disclosure. Additionally, our findings agree with prior research relating to industry sensitivity and firm size, further reinforcing the business-as-usual conclusion. Despite our conclusion that annual reports are likely to remain the primary source of sustainability risk disclosure, they may not be quite as predominant in the future as they once were. A significant number of Australian Accounting Review

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companies used other standalone reports to comply with the Recommendation. In fact, the Principles advocate: ‘To meet this recommendation does not require a listed entity to publish a sustainability report. However, an entity that does publish a sustainability report may meet this recommendation simply by cross-referring to that report’ (ASX CGC 2014: 30). Thus, in keeping with our business-as-usual finding, we expect that standalone sustainability reports, and maybe even integrated reports (IIRC 2013), will become a significant alternative outlet for reporting sustainability risks. Such reports are typical of hot new management trends, and companies that want to be seen as being ‘at the forefront’ will use them (Dumay and Dai 2017: 594). However, like annual reports, these reports are not specifically designed to disclose sustainability risks because they are often used to enhance reputation and, in the case of integrated reporting, they are not designed to report on issues of sustainability risk at all (Flower 2015). Similarly, as technology continues to advance, organisations are increasingly using the Internet to disclose information to stakeholders (Unerman et al. 2007; Guthrie et al. 2008). Prior researchers provide evidence that companies are increasingly using web disclosures to engage with stakeholders and meet their expectations in a timely fashion (Adams and Frost 2004; Patten and Crampton 2004; Frost et al. 2005; Lodhia 2005; Cho et al. 2009). Thus, if business continues ‘as usual’, we can expect to see further increases in internet disclosures of sustainability risk. But again, the issue will be whether the disclosures have the substance stakeholders expect.

Limitations and implications for future research Every research technique has its advantages and disadvantages, and content analysis is no exception. The first critique of content analysis is that figuring out what constitutes an exposure requires a necessary component of subjectivity (Deegan and Gordon 1996; Guthrie and Abeysekera 2006). To overcome this shortcoming, the lead author re-checked the disclosure coding after several weeks and compared the results to the prior coding with further verification by the co-author. If it had been necessary, the disclosure would have been recoded, but this was not needed. Secondly, content analysis deals with the frequency and volume of disclosures rather than the quality of the disclosures (Deegan and Gordon 1996; Guthrie and Abeysekera 2006). However, there is significant research that also measures quality using various scales and criteria (Dumay and Cai 2014, 2015). In this case we do not specifically measure quality. However, we do investigate the substance of the disclosures. This does not affect our research findings since the objective was to measure the extent (volume) to which companies disclose 14



sustainability risk, and part of that extent is the substance of the disclosures. To answer the research question, narrative disclosures were measured in words and non-narrative disclosures were measured in pixels; the volume of disclosures was then analysed. Zeghal and Ahmed (1990: 42) argue that complications in content analysis can result from small sample sizes when counting the volume of disclosures. We overcame this criticism by analysing the disclosures of 97 companies. However, these shortcomings create new avenues for further research. Future studies could use a mixedmethods approach, perhaps combining interviews with content analysis, to derive deeper insights into sustainability risk management and disclosures. Interviews with managers that deal with sustainability issues would allow a researcher to cross-check the sustainability risk practices against publicly available documents to reveal discrepancies between ‘what is said’ and ‘what is done’. Further research could also analyse larger sample sizes, longitudinal data, sub-categories, and more internal and external governance factors to garner more in-depth knowledge of corporate sustainability risk management practice and disclosure. Notes 1 http://au.spindices.com/indices/equity/sp-asx-100 as of 20 August 2016. 2 http://www.asx.com.au/products/gics.htm as of 20 August 2016. 3 See http://www.dowjones.com/products/product-factiva/, accessed 21 July 2016. 4 ‘Stakeseekers’ are defined as ‘groups that seek to uncover privately held information and put new issues on the corporate agenda, such as those with social, environmental, and governance concerns who are not investors or do not have a direct influence on a company’ (Dumay and Guthrie 2017: 11).

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