School of Accounting

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1 School of Accounting Seminar Session 1, 2012 An Empirical Study of the Global Reporting Initiative Disclosures in Australia, Brazil, Sweden and the U.S. Jacqueline Birt Monash University Date: Time: Venue: Friday 18 th May 3:00 to 4:30 pm Webster256

2 An empirical study of the Global Reporting Initiative disclosures in Australia, Brazil, Sweden and the U.S. Li Nga Man Martha, Michaela Rankin, Jacqueline Birt* Department of Accounting and Finance Monash University Abstract Sustainability is becoming increasingly important for a range of corporate stakeholders. As a result, they are now placing increasing demand on firms to provide disclosures of their sustainability activities and performance. We use stakeholder theory to develop hypotheses proposing an association between a range of country-level and firm-level factors and the extent of sustainability disclosure. This extent of disclosure is proxied by the GRI Guideline Application Levels in four countries of interest: Australia, Brazil, Sweden and the U.S. We find that at the country-level, Australian firms disclose at the highest level. At the firm level, we find firm size, industry and leverage are associated with the extent of disclosure. Further, the number of years firms have adopted the GRI Guidelines, and the external assurance of sustainability reports are more important in explaining the extent of sustainability disclosure than other firm-level characteristics such as financial performance. JEL Classification: M40, M41 First draft: please do not quote Keywords: Sustainability, GRI, stakeholder theory * Corresponding author: Department of Accounting and Finance, H Building, PO Box 197, Caulfield east, Victoria, Ph: ; Jacqueline.Birt@monash.edu 1

3 An empirical study of the Global Reporting Initiative disclosures in Australia, Brazil, Sweden and the U.S. 1. Introduction This study empirically examines country-level and firm-level factors relating to the extent to which firms have applied the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines (hereafter known as the GRI Guidelines) across sample firms in Brazil, Sweden, Australia and the U.S. Sustainability is a global concept that has been an issue for more than 40 years (Thomson, 2007). The call for government and organisational involvement in moving towards sustainability was first raised by the release of the Brundtland Report in Global public awareness of these issues is also raised through international sustainability summits and conferences, such as the 2002 Earth Summit and the upcoming 2012 Earth Summit (United Nations, 2011a). In addressing sustainability, governments have focussed on issues such as climate change, water scarcity and fighting poverty (United Nations, 2011b). The issue of sustainability is gradually being responded to by corporations, as evidenced by the increasing level of voluntary sustainability reporting 2 (KPMG, 2008). However, prior research has found that these disclosures tend to be self-laudatory (Deegan and Gordon, 1996, p. 198). Investors increasingly perceive the importance of corporate sustainability (Dow Jones Sustainability Index (DJSI), 2010). As stated by the Dow Jones Sustainability Index (DJSI), investors perceive sustainability as a catalyst for enlightened and disciplined management, and a crucial success factor because investors are also increasingly diversifying their portfolios by investing in firms that set industry-wide best practices with regards to sustainability (DJSI, 2010). Prior literature has found that in the long term, a high level of sustainability disclosure leads to consistently high share returns (Murray, Sinclair, Power and Gray, 2006). Hence, sustainability reporting is considered to be a crucial tool for firms in attracting investors. This view is further 1 The Brundtland Report is also titled Our common future. The report was published in 1987 by the United Nations World Commission on Environment and Development (UNWCED). It provides a definition of sustainability and raises firms awareness to the issue of sustaining non-renewable resources. It is also a foundation for the Agenda 21 which was adopted by more than 178 countries worldwide in Agenda 21 sets out actions plans for governments and organisations in dealing with human impacts on environment (UNWCED, 1987). 2 KPMG conducts a survey on corporate sustainability reporting practices of Global Fortune 250 (G250) companies at three-year intervals. In the most recent survey in 2008, it shows a 44% increase in G250 companies producing a sustainability report since 1999 (KMPG, 2008). 2

4 evidenced by the recent action of 24 institutional investors, who wrote to 30 of the world s largest stock exchanges to highlight the inadequacy of sustainability reporting by the listed firms on those exchanges (Reuters, 2011). Therefore, the global investment community see adequate sustainability reporting to be an important issue. Not only are the investment community now demonstrating concerns over sustainability reporting practice, other stakeholders, such as customers and employees, appreciate the importance of sustainability reporting. Reporting on sustainability performance can enhance a firm's reputation with socially responsible firms are less likely to be blamed by customers for a product failure (Klein and Dawar, 2004). In addition, sustainability reporting can effectively communicate to employees that firms are being socially responsible and it has been found to lead to higher employees morale, commitments and job satisfactions with socially responsible firms (Kim, Lee, Lee and Kim, 2010). We make three contributions to the extant research. First, we compare sustainability disclosure across a sample of both developed and emerging countries. Country of domicile has been found to be an important factor relating to the extent of disclosure (see for example Ho and Taylor, 2007; Newson and Deegan, 2002; Chen and Bovain, 2009), with the legal system being an important factor in explaining the extent of sustainability disclosure across countries (Hope, 2003). Other studies have found that culture (Orij, 2010), political (Ioannou and Serafeim, 2011) and economic factors (Newson and Deegan, 2002) play an explanatory role. However, most of these studies compare disclosure across developed countries (for example Japan and U.S. in Ho and Taylor, 2007; U.S., U.K., Germany and Australia in Chen and Bouvain, 2009). Few studies compare sustainability disclosure of developed countries with emerging countries. While Baskin (2006) finds firms in emerging countries have a similar extent of sustainability reporting to those in developed countries, Newson and Deegan (2002) contradict this finding. Calls to investigate sustainability reporting practice in emerging countries using theories that have traditionally been applied to firms in developed countries have been made (see for example Islam, 2010; Taylor and Shan, 2007). Hence, this study will further examine the role of country in explaining the extent of sustainability reporting, especially the difference between emerging countries, Brazil and developed countries, Australia, U.S. and Sweden. 3

5 Second, the study explores the association between extent of sustainability disclosure and a range of firm factors, including financial performance. Studies that have examined firm-level factors related to sustainability disclosure produce mixed results. While firm size and industry have been consistently found to be factors relating to the extent of sustainability disclosure (see for example Ho and Taylor, 2007; Christopher and Filipovic, 2008), there are mixed results relating to the significance of financial performance. 3 These mixed results likely stem from the different proxies used for financial performance. We attempt to resolve some of the conflicting results in prior research by using different proxies for these factors in testing the robustness of results and examine the generalisability of results in range of countries that have discernable cultural differences. Finally, we utilise the GRI Application Level as a measure of the extent of sustainability disclosure. The GRI Guidelines have been developed to assist reporting firms to develop a quality and internationally comparable sustainability report (GRI, 2011a). Firms adopting the GRI Guidelines can declare to the GRI which Application Level they have met in their sustainability report from C (lowest disclosure) to A (highest) Level. The distinct disclosure requirements for each Level provide a standardised and objective measure of the extent of sustainability disclosure. Prior research (see for example Clarkson, Li, Richardson and Vasvari, 2008; Ho and Taylor, 2007) develops disclosure indices by decomposing relevant components of the GRI Guidelines and assigning a score to each component. Joseph and Taplin (2011) note that self-constructed indices of this nature are subjective and less sensitive to the extent of sustainability disclosure. The current study is the first to use the GRI Application Level as a proxy for the extent of sustainability disclosure, and it is believed it will overcome some of the major limitations of a self-constructed index (Joseph and Taplin, 2011). We find that the country a firm is domiciled is associated with variation in the extent of sustainability disclosure. Further, Australian firms have significantly higher sustainability disclosure when compared with firms in other countries. At the firm-level, results indicate that firms which are larger in size, operating in sustainably high profile industries and have lower financial risk adopt a higher GRI Application Level, i.e. higher extent of sustainability disclosure. Results provide support for the argument that those firms with higher financial risk are more 3 Menz (2010) finds a negative association between disclosure and corporate bond risk premiums, while Berman, Wicks, Kotha and Jones (1999) find a positive relation with return on assets. 4

6 financial dependent on financial stakeholders and hence providing a lower extent of sustainability disclosure as sustainability stakeholder are less powerful than other financial stakeholders when firms are faced with higher financial risk. An interaction variable representing industry and country of origin incorporated into the model also results in significant results. Not only do firms in sustainably high profile industries provide higher extent of sustainability disclosure, the disclosure will be even higher if these firms are domiciled in Australia. The study is expected to be useful to a number of stakeholder groups, including stock exchanges, the GRI, governments and reporting entities, in understanding motivations for sustainability reporting. With the increasing importance placed on sustainability performance by institutional investors (Reuters, 2011), results of this study should be able to assist stock exchanges around the globe in ensuring listing rules respond to the needs of institutional investors for higher quality sustainability disclosures. Further, it will assist the GRI to evaluate the Application Level system and provide a reference as to how the Application Level system can be modified to better suit adopter s needs in terms of their individual characteristics. While some factors might have an impact on the extent of disclosure, strategies to promote improved sustainability disclosure can be formulated based on the significant factors found. This study will assist reporting entities to appreciate the ability of the application of the GRI Guidelines to enhance the quality of sustainability information and exposes reporting entities to the existing sustainability disclosure practice by other reporters. The rest of this paper proceeds as follows. Section 2 provides background information on the emergence of the GRI Guidelines and Application Levels. Section 3 outlines the theoretical framework to be used to develop testable hypotheses, and the resulting hypotheses to be tested in this study. Section 4 discusses the research method used. Results of this study are presented in Section 5. Finally, section 6 concludes the study with a summary and implications of results, limitations of the study and directions for future research. 2. Global Sustainability Development and the GRI The progress of global sustainability is an ongoing issue evidenced by Earth Summits, held every five to ten years, which commit governments to engage in setting goals for sustainability development. The upcoming summit, "Earth Summit 2012", is to be held in Brazil in June Through these Summit outcomes, there is evidence that the ongoing commitment by world 5

7 governments and firms in sustainability development progress are not strong enough (WWF, 2002). Institutional owners have also realised this fact and have initiated an action to demand more sustainability disclosure by writing to the world s 30 largest stock exchanges and requesting the stock exchanges for incorporating higher sustainability disclosure requirement in the listing rules (Reuter, 2011). Subject to this external pressure, firms will then have to initiate moves towards sustainability development and account for their performance through sustainability disclosure. In assisting and encouraging sustainability disclosure practice, a number of international bodies have provided guidelines for disclosing environmental and/or sustainability performance. 4 The Global Reporting Initiative (GRI) is the world s most widely used sustainability reporting framework (KPMG, 2008) providing a worldwide sustainability reporting standard, (the GRI Guidelines). The GRI was originally formed by the Boston-based non-profit CERES (formerly the Coalition for Environmentally Responsible Economies) in 1998 (GRI, 2011a). The GRI s mission is to make sustainability reporting standard practice by providing guidance and support to organizations (GRI, 2011c, para. 2). Hence, the GRI is working on providing a standardised framework for reporting firms social, economic and environmental performance. Reporting firms using the GRI Guidelines will have to report on three dimensions: company strategy and profile, management approach and performance indicators. The development of the GRI guidelines has involved different stakeholder groups such as business, civil society, academia, labour and other professional institutions from over 60 countries (GRI, 2011d). Through continuous discussion and the development of consensus among these stakeholder groups, the GRI Guidelines provide sustainability reporting guidance which is expected to suit the needs of worldwide stakeholders (GRI, 2011d). The first generation of the GRI Guidelines G1 was formally released in Firms adopting the GRI guidelines provide performance disclosures on the three main areas of environmental, economic and social performance. Further, firms also provide details on their sustainability management approach, 4 These non-profit organisations include the GRI, AccountAbility, and the Sustainability Integrated Guidelines for Management (SIGMA) Project. While some focus heavily on environmental issues, a number focus on the broader scope of sustainability issues. These international organisations generally provide indicators as to what constitute a quality sustainability or environmental report. 6

8 where reporting firms are expected to state their commitments, strategy and goals relating to environmental, economic and social performance (GRI, 2011e). When the formal GRI Guidelines was first released in 2002, only 80 companies worldwide adopted them to provide sustainability reports (GRI, 2011a). Since then, the GRI has continued to improve and modify the Guidelines. They have sought to make sustainability reports internationally comparable by translating the GRI Guidelines into different languages and provide sector supplements to ensure compatibility of the Guidelines for different industry sectors (GRI, 2011a). This standardised framework has gained a great deal of support in the field of sustainability reporting in a short period of time and provides a framework that balanced diverse stakeholders needs (Gilbert and Rasche, 2008). From the most recent (2010) figures, the number of firms adopting the Guidelines has risen to 1,854 firms. Figure 1 shows the number of firms adopting the GRI Guidelines between INSERT FIGURE 1 HERE 2.1 The GRI Application Level Recognising that the full implementation of the Guidelines is costly for first time users, the GRI allows incremental application of the Guidelines to encourage firms taking the initiative in providing sustainability reports (Woods and Colson, 2003). Further, since sustainability reporting practice is generally voluntary worldwide, firms differ in their adoption and extent of sustainability disclosure. Due to this variation, all reporters using the G3 GRI Guidelines are recommended to declare their extent of adoption based on the GRI Application Levels system (GRI, 2006). This system ranks sustainability reports from C to A, reflecting an increasingly complete application of the Guidelines (GRI, 2006). As previously stated, firms adopting the GRI Guidelines report on three dimensions: company strategy and profile, management approach and performance indicators. Each of the Application Levels has different disclosure expectations on these dimensions. Figure 2 provides a summary of the disclosures needed in each dimension for each Application Level. C 5 Recently, the GRI released the latest generation of the Guidelines ( G3.1 ) which provides a more comprehensive list of indicators to be disclosed in sustainability reports, especially in the area of human rights, local community impact and gender (GRI, 2011e). This also provides more guidance on defining quality and setting boundaries for the sustainability report. Striving for continuous improvement, the GRI is now working on the development of G4, which is expected to be released in The aim of the G4 will be to create value through the provision of sustainability report using the GRI Guidelines by increasing clarity on definitions of technical term and provision of more relevant information to each stakeholder group (GRI, 2011f). 7

9 Application Level requires the least disclosure, with only partial disclosures are required on profile disclosure and performance indicators on the three pillars- social, economical and environmental performance. Some disclosure is exempted for adopters of C Level under the GRI reporting framework, such as information on assurance. However, for firms reporting at the A Application Level, full disclosure is required. Sustainability reports will have an additional + sign attached to the application level if the report is externally assured. The Application Level of each reporting firm is shown publicly on the GRI website. With this system in place, the extent to which companies have applied the Guidelines for their sustainability report can be easily identified and will enhance communication with stakeholders, particularly institutional owners who, as previously indicated, are concerned about inadequate sustainability disclosure (Reuter, 2011). INSERT FIGURE 2 HERE 3. Theory Development Socio-political theories, such as legitimacy theory (e.g. Newson and Deegan, 2002), institutional theory (e.g. Aerts et al, 2006) and stakeholder theory (e.g. Van der Laan Smith et al, 2005) largely dominate the sustainability literature in explaining the reasons for sustainability reporting. Legitimacy theory is most suited to explaining the change in sustainability reporting practice in an attempt to repair firms legitimacy when firms breached their licence to operate, e.g. an oil spill (Patten, 1992) or radical change in industry requirements (Elijido-Ten et al., 2010). Without the need to repair the damaged legitimacy due to a breach of their licence to operate, firms in normal operational circumstances are more likely to determine the extent of sustainability disclosure based on stakeholders needs (Gray, Owen & Adams, 1996). Institutional theory has been used to explain the homogeneity of organisations that operate in the same business environment (DiMaggio and Powell, 1983). Under institutional theory, firms are argued to respond to external pressure by their respective stakeholders on sustainability issues by mimicking larger firms sustainability reporting practice in order to maintain the state of legitimacy to continue operating within the business environment (Aerts et al., 2006). Therefore, it is based on the notion of legitimacy and stakeholder power is the main driving force underlying the process of isomorphism. This highlights the overlapping nature of the sociopolitical theories in explaining the sustainability reporting practice (Deegan, 2002). Given this 8

10 overlap, and the limited usefulness of legitimacy theory in the context of this study, we use stakeholder theory to develop testable hypotheses. Stakeholder theory aims to resolve the question: Which groups are stakeholders deserving or requiring management attention, and which are not? (Mitchell et al., 1997, p.855). Stakeholders are defined as any group or individual who can affect or is affected by the achievement of the organisation s objectives (Freeman, 1984, p.46). Not all stakeholders are treated equally. Firms will identify those stakeholders that have greater power to impact on business operations (Gray et al., 1996) and greater control of resources that are demanded by the firms (Ullmann, 1985) as primary stakeholders. These primary stakeholders will be given priority in having their demands satisfied (Roberts, 1992). This identification and prioritisation of stakeholder groups should be handled properly using stakeholder management based on the stakeholder s attributes (Harrison and Freeman, 1999) and formulate managerial strategies in order to balance the interests of different stakeholder groups (Freeman, 1984). Stakeholder theory has been identified to contain different branches, which are normative, instrumental and descriptive branches (Donaldson and Preston, 1995) 6. Stakeholder influence over sustainability reporting practice can be explained by the instrumental branch of stakeholder theory (Donaldson & Preston, 1995). It helps predict organisational behaviour which links managerial actions to outcomes and attempts to explain how these links work (Scholl, 2002, p.7). Sustainability reporting following the GRI Guidelines is considered as a communication tool with diversified stakeholders (Brown et al., 2009) and hence, it is part of the stakeholder management strategy. With the application level system implemented by the GRI, reporting firms using the GRI Guidelines have discretion over the extent of disclosure made based on the stakeholders attributes (Agle, Mitchell and Sonnerfeld, 1999). The extent to which a stakeholders demand can be satisfied is dependent upon the stakeholders attributes power, legitimacy and urgency (Mitchell et al., 1997). Mitchell et al. (1997) adopted Salancik and Pfeffer s (1974) definition of power whereby power is the ability to force a firm to produce outcomes that the stakeholders desire. Coff (1999, p.122) provides some examples. He explains that stakeholders have more power if they (1) are capable of acting in a 6 The normative branch refers to how managers should treat stakeholders. The instrumental branch refers to how firms manage stakeholders in the best interest of the company. The descriptive branch refers to what managers are actually doing in managing stakeholders (Jones and Wicks, 1999). 9

11 unified manner, (2) have access to key information, (3) have a very high replacement cost to the firm, and (4) face low costs if they move to another firm. Therefore, the more power the sustainability stakeholder group has, the more likely that they will be able to force the firm to provide a greater extent of sustainability disclosure. Legitimacy is another attribute that give salience, i.e. significant influence, to a particular stakeholder group according to Mitchell et al. (1997). Legitimacy in the context of stakeholder theory refers to the ability of stakeholder groups to demand action from a firm which is congruent with stakeholders expectations and the stakeholder are empowered to demand for actions as it is implicit in the social contract firms have with the external stakeholders (Mitchell et al., 1997). Urgency reflects the change in importance of different stakeholder groups across time (Mitchell et al., 1997). The degree of urgency is defined based on two components timesensitivity and criticality (Mitchell et al., 1997). Time sensitivity refers to how unacceptable it will be from the view of stakeholders if managers defer the actions that the stakeholder desired. Criticality refers to how important the action demanded is to stakeholder groups. The stakeholders will be salient in the eye of the manager if the action is so critical to the stakeholder that its deferment is unacceptable (Mitchell et al., 1997). Therefore, the salience of the stakeholder is not static in nature and priority is given to stakeholders relative to the urgency of different stakeholder groups. The higher the urgency the sustainability stakeholder is relative to other stakeholders, the more likely firms will provide a higher extent of sustainability disclosure. While the attributes power and legitimacy may seem to overlap with each other, these attributes are distinct concepts (Weber, 1947; Davis, 1973). A stakeholder group with a legitimate claim on a firm may not necessarily have enough power or urgency to force a firm to perform as desired. Hence, the three attributes need to be taken into account together to determine the salience of a stakeholder group in the eyes of management. In particular, Agle et al. (1999) find that urgency is more important than the other two attributes. Hence, if sustainability stakeholders are perceived as having higher urgency, legitimacy and power than other stakeholder groups in the eye of managers, the firms are likely to have a higher sustainability disclosure made in response to the sustainability stakeholders, and it is even more likely if the stakeholder have higher urgency compared with other stakeholders. 10

12 The relative power of different stakeholders is not merely affected by their power to impact on business operations alone, but also dependent on the cultural characteristics of the country in which firms operate (Van der Laan Smith et al., 2005). Firms operating in countries that are more concerned with social issues will more easily succumb to stakeholder demand for sustainability information, resulting in a higher level of sustainability disclosure as stakeholder are more powerful and legitimate in manager s perspective (Mitchell et al., 1997). The legal system in a country of origin has commonly been examined in relation to the degree of stakeholder-orientation in management (see for example Simnett et al., 2009; Van der Laan Smith et al., 2005). Countries with a code law system in place are considered to be more stakeholder-oriented than common law countries (Simnett et al., 2009). Firms operating under a code law regime are subject to higher politicisation that involves different major groups, such as labour unions, banks and business associations (Ball et al., 2000). As such, stakeholders in code law countries, who are interested in sustainability performance, are more likely have more legitimacy to demand higher levels of sustainability disclosure (Simnett et al., 2009). While culture is a multi-dimensional and complex construct (Van der Laan Smith et al., 2005, p.132), the example of the distinction between legal systems in a country of origin supports the view that stakeholder power varies both at firm and country level. In summary, firms are likely to prioritise stakeholder groups based on their attributes legitimacy, power and urgency. These attributes together determine the likelihood the management will act as the stakeholder s desires. Hence, if managers perceive sustainability stakeholders as more legitimate, powerful and with higher urgency, firms are more likely to provide greater sustainability disclosure to satisfy their needs. Testable hypotheses are developed in the following section suggesting that both country-level and firm-level factors relate to the identification of stakeholder needs, which in turn, impacts on the extent of sustainability disclosure. 3.1 Country factors Cultural (Orij, 2010), legal (Hope, 2003), and economic (Newson and Deegan, 2002) differences have been found to impact on the extent of sustainability disclosure. Chen and Bouvain (2009) find that reporting practices are significantly different among firms in the U.S., U.K., Australia and Germany, which suggests that the country of origin matters in sustainability 11

13 reporting. The authors further examine the impact of country of origin on each specific aspect of the sustainability report and find country of origin to have the most influence over social, community and customer disclosure. Adams and Kuasirikun (2000), draw a similar conclusion when they compare the ethical disclosure of U.K. and German firms in the chemical and pharmaceutical industries. While firms in these two industries are expected to make equally adequate disclosures of social and environmental issues, given they are high profile industries facing diversified issues on these two aspects, the authors find significantly more disclosure by German firms. Differences in country characteristics have been found to lead to differences in the degree of importance that the firms places on stakeholders, based on the salience to the firm of stakeholder attributes. (Van der Laan Smith et al., 2005). In a stakeholder-oriented society, stakeholders will have more power, possess greater legitimacy and have their claims viewed with greater urgency (Van der Laan Smith et al., 2005). While it has been suggested in prior literature that the legal system is a factor that determines the degree of stakeholder power for a country (see for example Simnett et al., 2009), other cultural aspects of a country can also generate a difference in terms of the level of stakeholder power a firm faces (Van der Laan Smith et al., 2005). Since the countries of interest examined in this study are different in terms of cultural, legal, political and economical factors, firms in each country are likely to have differing levels of stakeholder orientation. For example, firms in countries with different legal systems will have different degree of stakeholder orientation due to the difference in the governance structure (Ball et al., 2000; Simnett et al., 2009). Further, developed countries are subject to higher stakeholder expectations (Newson and Deegan, 2002). These examples suggest that different country factors will lead to firms placing different values on the importance of stakeholder demands for information about sustainability performance, which will therefore result in a different degree of sustainability disclosure. This leads to the first hypothesis: H1: A firm s country of origin is likely to relate to the extent of sustainability disclosure. To examine further how specific country factors are likely to impact on the extent of sustainability disclosure, two sub-hypotheses are developed. 12

14 A country s legal system is an important aspect that relates to the extent of sustainability disclosure (Hope, 2003). Ho and Taylor (2007) note differences in both the cultural and financing structure between Japan and the U.S., which lead to a difference in the extent of the sustainability disclosure. The variation in financing structure is based on the differing legal systems in the two countries. Japan is a code law country that is less reliant on public disclosure (Ball, 1995). Private communication dominates the firm structure in code law countries such as Japan, which leads to a more stakeholder-oriented governance model when compared with common law countries, such as the U.S. As such, Japanese firms are found to have more disclosure in Ho and Taylor s (2007) study. Consistent with Ho and Taylor (2007), Simnett et al. (2009) also find that firms in code law countries are more likely to provide sustainability reports than common law countries. This difference in the legal system will lead to a difference in the country s social value on the stakeholder importance (Van der Laan Smith et al., 2005). Compared with common law countries, code law countries are more stakeholder-oriented due to the different in the financial structure between the country types (Ball et al., 2000). Hence, Simnett et al. (2009) find empirical evidence that firms in code law country are more likely to adopt sustainability reporting practice because firms operating under a code law regime are subject to higher politicisation that involves different major stakeholder groups. Firms in code law countries are more likely to respond to external stakeholders compared with common law countries as these stakeholders are more legitimate and powerful in demanding for further information (Ball et al., 2000). Sustainability stakeholders in code law countries are more likely to have their demand heard by the managers compared those sustainability stakeholders in common law countries. Therefore, firms in code law counties are expected to have a greater extent of sustainability disclosure. Hence, a sub-hypothesis is developed as follows. H1a: A firm domiciled in a country with a code law system is likely to have a higher extent of sustainability disclosure, when compared with a firm domiciled in a country with a common law system. In addition to legal factors, a country s economic status is likely to impact on the extent of sustainability disclosure. Baskin (2006) compares sustainability disclosure in Europe, Japan, North America and a number of emerging markets (Brazil, Russia, India, China and South 13

15 Africa). While the study finds no overall significant difference in the extent of sustainability disclosure between developed and emerging countries, firms in developed and emerging countries are found to report on different aspects of sustainability performance. The author shows that firms in emerging markets tend to put more emphasis on social investment while less focus is placed on disclosure of environmental and human resources information. For the developed firms, they are found to have higher disclosure on business ethics. Prior studies (e.g. Chen and Bouvain, 2009; Ho and Taylor, 2007) examining the general contextual factors are usually conducted in developed countries. A review of emerging country literature by Islam (2010) indicates that only limited prior research has compared the sustainability disclosure practice between emerging and developed countries. In this study, a comparison is made between developed and emerging countries. It could be proposed that firms in developed countries are subject to global expectations to play a greater role in sustainability development and hence, more sustainability disclosure is expected to be provided (Newson and Deegan, 2002). However, some statistics on emerging countries indicate that firms in emerging markets do not necessarily have a lower level of sustainability disclosure (Baskin, 2006). In fact they often have more disclosures in some specific aspects of social performance, such as social investment. This is due to the fact that firms in emerging markets see sustainability disclosure as an effective tool to communicate with their stakeholders for having credible management practice and are contributing to the community as well (Baskin, 2006). Therefore, applying stakeholder theory, firms in emerging countries have a greater urgency to meet the demand from more powerful stakeholder in order to legitimise the existence of the firms through the provision of sustainability. Hence, a sub-hypothesis is developed as follows. H1b: A firm domiciled in an emerging market is likely to have a higher extent of sustainability disclosure, when compared with a firm domiciled in a developed country. 3.2 Firm level factors While these firm-level studies generally focus on Western countries (e.g. Australia in Christoper and Filipovic, 2008 and Clarkson et al., 2011; Germany in Gamerschlag et al., 2011; U.S. in Clarkson et al., 2008), Taylor and Shan (2007) note that these factors may not be applicable to non-western countries. In support of this contention, the authors found only marginal significance on the association between firm size and sustainability disclosure using a 14

16 sample of Chinese companies listed in Hong Kong, but firm size used to show strong significance in Western countries studies (see for example Christopher and Filipovic, 2008). Prior studies have found a range of firm characteristics to have an impact of the extent of sustainability disclosure. Prior research finds that firm size, industry and leverage are related to the extent of sustainability disclosure in Australia (Christopher and Filipovic, 2008; Clarkson, Overell and Chapple, 2011), the U.S. (Clarkson et al., 2008; Boesso and Kumar, 2007), Germany (Gamerschlag, Moller and Verbeeten, 2011) and Portugal (Branco and Rodrigues, 2009). As previously discussed, the importance of stakeholder groups in influencing sustainability disclosure is dependent on their attributes power, legitimacy and urgency (Agle et al., 1999). As larger firms have more political visibility (Dowling and Pfeffer, 1975; Gamerschlag et al., 2011), they are more likely to attract more attention from powerful stakeholders (Deegan and Carroll, 1993), such as pressure groups (Roberts, 1992; Deegan and Blomquist, 2006). These stakeholders are interested in sustainability performance of larger firms as they are likely to have more sustainability issues for its larger operation scales (Artiach, Lee, Nelson and Walker, 2010). Therefore, larger firms are more likely to experience more intense stakeholder power created by a larger group of stakeholders demanding for more sustainability disclosure (Cowen, Ferreri and Parker, 1987). This intense stakeholder power will enhance managerial attention to satisfy the demands of these powerful stakeholders as these large firms are unable to ignore these demands given high political visibility and pressure (Artiach et al., 2010). Further, it is consistently found in voluntary disclosure literature that the cost for large firms in providing information will be lower (Lang and Lundholm, 1993). Subject to the pressure from these powerful stakeholders and at the same time having lower cost in information, managers of these larger firms will have more incentives to disclose more sustainability information to manage their relationships with these powerful stakeholders in order to gain their support and approval, or to distract their opposition and disapproval (Gray et al., 1996, p.45). Therefore, a hypothesis is developed as follows: H2: Firm size is positively related to the extent of sustainability disclosure. The degree of stakeholder power depends also on the industry the business operates in, as stakeholders will have different issues of concern across different industry sectors (Roberts, 1992; Halme and Huse, 1997). For example, manufacturing firms will be more concerned with social issues such as child labour usage. Nike and Gap were once boycotted by consumers due to the 15

17 use of child labour (Anonymous, 2005). To avoid such a boycott, other manufacturing companies, such as Reebok, became members of the Fair Labour Association as proof of fair labour usage for its stakeholders (Anonymous, 2005). Firms are consequently likely to increase their disclosures of these issues in order to assure powerful stakeholders, such as consumers, of their actions. Further, firms in industries such as the utilities, paper and pulp sectors are considered to be more polluting, and have been found to provide more comprehensive disclosures about their environmental performance (Clarkson et al., 2008). Therefore, some industries are comparatively more sensitive to sustainability issues as they have more legitimate stakeholders to be dealt with, and the urgency of responding to these stakeholders through disclosure rises when these stakeholders take action against the firms. Prior studies have classified these industries as high profile industries, such as food and tobacco, automotive, chemicals, mining (Newson and Deegan, 2002). Hence, firms operating in these high profile industries are likely to disclose more sustainability information. This leads to the following hypothesis: H3: A firm in a sustainably high profile industry is likely to have a higher extent of sustainability disclosure, compared with firms in sustainably low profile industries. Firm financial performance is another characteristic that is likely to relate to the level of sustainability disclosure. Prior evidence suggests that firms are more profitable if they have better relationships with employees and customers (Berman et al., 1999). Further, as profitable firms have more social constraints and public exposure (Holthausen and Leftwich, 1983), failure to meet the needs of stakeholders will in turn threaten the existence of firms (Pava and Krausz, 1996; Preston and O Bannon, 1997). Hence, stakeholders of more profitable firms tend to be more legitimate and powerful to demand actions. Subject to these social constraints from more legitimate and powerful stakeholders, manager of profitable firms are more likely to take a more stakeholder-oriented management approach as to respond to the social expectation imposed on the profitable firms. Therefore, managers from profitable firms perceive higher importance to provide sustainability information in response to the social constraints imposed by the stakeholders and hence, they are more likely to provide a greater extent of sustainability disclosure. 16

18 While some literature have found positive relation between the sustainability disclosure and financial performance, some prior evidence shows inconclusive results on this association by using different proxies of financial performance. Share returns tend to be higher for firms with consistently higher sustainability disclosure (Murray et al., 2006), and Bronn and Vidaver-Cohen (2009) find that firms engage in sustainability reporting practice for the purpose of improved financial performance (Bronn and Vidaver-Cohen, 2009). On the other hand, Murray et al. (2006) and Guidry and Patten (2010) find no association between sustainability disclosure and shortterm share returns, and Menz (2010) finds a negative association with bond risk premium. These results are likely to differ due to the proxy used to measure financial performance, with most of the inconsistent results are found using a financial market proxy while positive results are found when accounting measure of financial performance are used. It is hypothesised in this study that profitable firms are subject to more social constraints from powerful stakeholders. In respond to the sustainability stakeholders, profitable firms are expected to produce higher extent of sustainability disclosure. Therefore, the association between firm financial performance and sustainability disclosure is hypothesised as follows: H4: Firm performance is positively related to the extent of sustainability disclosure. Firms with greater levels of financial risk have greater financial obligations and will attract more attention from their financial stakeholders, which in turn leads to an increased demand for more financial information in order to monitor firm performance (Francis, Nanda and Olsson, 2008). Given limited firm resources, firms have to prioritise stakeholder groups in terms of responding to these demands. This creates conflicting interests between financial stakeholders and sustainability-concerned stakeholders (Mitchell et al., 1997). Therefore, managers have to strike a balance based on the stakeholders attributes and determine the priority of satisfying their information needs (Agle et al., 1999). As firms with higher financial risk are more financially dependent on creditors, creditors are more likely to have higher power relative to the other stakeholders as they are likely to have a greater ability to impact on business operations (Gray et al., 1996) and greater control of financial resources (Ullmann, 1985). Firms with greater levels of debt are likely to need to satisfy financial stakeholders ahead of sustainability stakeholders and hence less attention will be placed on the issue of sustainability (Brammer and Pavelin, 2008). Therefore the following hypothesis is proposed: 17

19 H5: Financial risk is negatively related to the extent of sustainability disclosure. 4 Research Design 4.1 Sample selection The sample consists of listed firms from four countries chosen on the basis of their differences relating to cultural, legal, political and economical factors. As previously indicated, the four countries investigated are Australia, Brazil, Sweden and the U.S. The sample is identified from the total firms reporting their application level to the GRI in 2010 for each sample country. This data is available from the GRI website. The U.S. (115) has the highest number of GRI reporting companies, followed by Brazil (112), Sweden (87) and Australia (57). Some firms are excluded from the sample due to the fact that they are non-public companies where financial data is not available. As shown in Table 1, the exclusion of non-public companies results in a sample of 194 firms available for further testing. The main databases used to obtain firm-level data are Orbis and Datastream. Additional financial data such as total assets, financial risk and profit after tax is hand-collected, where necessary, from company annual reports for the year ended Data to measure the dependent variable - GRI Application Level - in addition to profile data of individual firms such as industry, number of years the GRI Guidelines have been adopted and external assurance of the sustainability report are obtained from the GRI database. INSERT TABLE 1 ABOUT HERE 4.2 Definition of variables Dependent variable GRI The dependent variable for this study is the GRI Application Level adopted by the firms in the production of sustainability reports. Companies which provide sustainability reports based on the GRI reporting framework are encouraged to declare the extent of sustainability disclosure, to the GRI, using this GRI Application Levels system. As previously indicated, there are three progressive levels of application - C Level to A Level. C Level represents the lowest extent of disclosure as required by the GRI guidelines and A level represents full disclosure based on the requirements of the GRI Guideline (GRI, 2006). Hence, these application levels can be used as a proxy for the extent of sustainability disclosure. 18

20 Explanatory variables country-level COUNTRY (H1) Hypothesis 1 examines the association between a firm s country of origin and the extent of sustainability disclosure. The study uses sample firms from four countries - Australia, Brazil, Sweden and the U.S. COUNTRY is a categorical variable coded in accordance with the alphabetical order of their names as follows. COUNTRY: 1 = Australia; 2 = Brazil; 3 = Sweden and 4 = U.S. LEGAL (H1a) As the study is also interested in examining whether specific country factors are associated with the extent of sustainability disclosure, a sub-hypothesis H1a is derived to examine if the legal system of the country is a factor. An explanatory dummy variable, LEGAL is represented by one if the firm is domiciled in a country with code law system, and zero if the firm is domiciled in a country with a common law system. ECON (H1b) A dummy variable, ECON, takes into consideration the effect of firms in emerging markets. ECON is coded as one if a firm is domiciled in an emerging country, and zero if a firm is domiciled in a developed country. Explanatory variables firm-level SIZE (H2) Firm size is hypothesised to be positively related to the extent of sustainability disclosure. SIZE is proxied by year-end total assets of the firm. In addition to using total assets as a proxy for firm size, market capitalisation will be used as an alternative measure in sensitivity testing. Market capitalisation - SIZE2 - is computed as the number of ordinary shares outstanding at the year end multiplied by share price at the year end. IND (H3) Hypothesis 3 proposes that firms in sustainably high profile industries are likely to have a higher extent of sustainability disclosure, compared with firms in sustainably low profile industries. A dummy variable, IND, is coded as one if the sample firm is in sustainably high 19

21 profile industry, and zero if the firm is in sustainably low profile industry. This high profile/low profile industry classification is based on Newson and Deegan (2002). Consistent with their study, firms operating in automotives, aviation, chemicals, energy, food and beverage, forest and paper product, metal products, mining, telecommunications and water utilities are classified as operating in a high profile industry. PERF (H4) In accordance with Hypothesis 4, it is expected that firm performance is positively related to the extent of sustainability disclosure as profitable firms have more social constraints and political visibility (Holthausen and Leftwich, 1983). Subject to the social constraints, profitable firms are more likely to provide a higher extent of sustainability disclosure. Firm performance - PERF- is measured as a firm s return on assets, computed as earnings before interest and tax divided by total assets. The same measure is also used by Christopher and Filipovic (2008) and Ho and Taylor (2007). RISK (H5) The last hypothesis tests whether financial risk is associated with the extent of sustainability disclosure. It is believed that the urgency to respond to sustainability stakeholders is less than financial stakeholders where firms are faced with high financial risk. Financial risk - RISK- is measured as a firm's leverage ratio, calculated by total liabilities divided by the average of total assets. Control variables YEAR Woods and Colson (2003) notes that the GRI allows different levels of application of the Guidelines in order to encourage new adopters to initiate moves to sustainability reporting. Hence, a new adopter is expected to show lower levels of disclosure. Further, the GRI state that the application level system is to provide a pathway towards continuous improvement of companies sustainability reporting (GRI, 2011b, para. 1). Therefore, it is expected that reporting firms will increase the extent of disclosure over time. To control for this effect, YEAR is included to control for the number of years firms have followed the GRI Guidelines. YEAR is defined as the number of years firms have adopted the GRI Guidelines for sustainability reports. 20

22 ASSURE Simnett et al. (2009) found that stakeholder-oriented firms are more likely to have their sustainability reports assured. While it is found that external assurance increases quality of the sustainability disclosure (Moroney, Windsor and Aw, 2011), this improved quality will also lead to an increase in the extent of disclosure (Clarkson et al., 2008). Hence, a dummy variable, ASSURE, is included as a control variable, and is measured as one if the report has been externally assured, and zero if the report has not been externally assured. CDP The Carbon Disclosure Project (CDP) was initiated by a consortium of over 551 institutional investors (CDP, 2011). Over 3,000 companies in 60 countries are participated in the project to provide information on their carbon emissions, water management and climate change strategies in order to assist investors in making investment decisions (CDP, 2011). It provides a standardised disclosure framework, like the GRI Guidelines, specifically related to the issue of climate change (Kolk, Levy and Pinkse, 2008). Respondents to the CDP are expected to be more devoted to sustainability development, especially on climate change and hence, a dummy variable, CDP, is included to control for this effect. CDP is measured as one where a firm has provided information to CDP, and zero otherwise. 4.3 Empirical Tests Univariate tests Univariate tests are undertaken for country-level factors. In addition to testing the main country-level hypothesis H1, two sub-hypotheses which examine whether or not specific country factors have an association with the extent of sustainability disclosure are also tested. A Chisquare test will be conducted to test both H1a (LEGAL) and H1b (ECON). However, multivariate analysis will provide more concrete evidence of the relative importance of these firm characteristics. 21

23 Multivariate tests To test hypotheses H2-H5 (firm-level factors), the following ordinal regression model is used. GRI = f (a 0 + b 0 SIZE + b 1 IND + b 2 PERF + b 3 RISK + e) (1) Dependent variable GRI = ordinal variable representing GRI Application Level, 1 = C Level, 2 = B Level and 3 = A Level; Explanatory Variables SIZE (H2) = IND (H3) = PERF (H4) = RISK (H5) = company size, measured as natural log of year-end total asset; dummy variable representing industry the GRI reporting company operating in, 1 if firm operating in high profile industry, 0 otherwise; company performance, measured as year-end return on asset; company financial risk, measured as leverage ratio computed as year-end total liabilities divided by average total assets It is anticipated that SIZE, IND and PERF will show a positive and significant relationship with GRI in model (1) for H2, H3 and H4. Conversely, RISK is expected to show negative and significant relationships with GRI in order to provide support for H5. Model (2) incorporates control variables together with the main firm-level variables of interest to control for other possible significant factors in relation to the extent of sustainability disclosure. GRI = f (a 0 + b 0 SIZE + b 1 IND + b 2 PERF + b 3 RISK + b 4 YEAR + b 5 ASSURE + b 6 CDP + e) (2) GRI, SIZE, IND, PERF and RISK are as previously defined. YEAR = Number of years firms have adopted the GRI Guidelines in sustainability reporting; ASSURE = dummy variable representing 1 if the sustainability report has been externally assured, 0 otherwise; CDP = dummy variable representing 1 if the firm has provided information to CDP in 2010, 0 if the firm did not reply to CDP s request or declined to participate in the project. 22

24 5 Empirical Results 5.1 Country-level factors Figure 3 depicts the percentage of firms out of the whole sample (n=194) in each Application Level by country. The graph indicates differences in disclosure across sample firms. Results show that Australia has the least number of firms reporting at C Level (10.71% of the Australian sample) and more firms reporting at A Level (60.71% of the Australian sample. However, a different situation is found with the U.S. firms where most firms reports at the B Level (55.06% of the U.S. sample) while there are a similar portion of firms in U.S. reports at A and C Levels (24.72% and 20.22% of the U.S. sample respectively). For Brazil (29.17%, 33.33% and 37.50% of the Brazilian sample for C, B and A Levels respectively) and Sweden (27.27% of the Swedish sample for A Level and 36.36% for both B and C Levels), the differences in the percentage of firms in each Application Level are less obvious and each application level constitutes similar portion of firms in Brazil and Sweden. INSERT FIGURE 3 ABOUT HERE Further, this study also examines whether the legal system in the country of domicile (H1a) and economic status (H1b) are related to the extent of sustainability disclosure. As shown in Table 2, the sample countries depict Australia and U.S. are countries with a common law system, while Sweden and Brazil have a code law system. Australia, Sweden and U.S. are developed countries and Brazil is an emerging market country. INSERT TABLE 2 ABOUT HERE Panel A of Table 3, shows the Chi-square test results of the association between GRI and COUNTRY (H1), GRI and LEGAL (H1a) and GRI and ECON (H1b) respectively. While no significant association is found for LEGAL (H1a) and ECON (H1b), the COUNTRY variable has a significant association with GRI at the 1% level. This provides support for H1 that the country of origin makes a difference to the extent of sustainability disclosure and concurs with results found in Van der Laan Smith et al. (2005) and Newson and Deegan (2002). Panel B provides the results on the spearman correlation tests carried out for each pair of countries against GRI. Results show that Australia is a significant country variable. Firms from Australia have a significantly higher GRI application level than those from Brazil at 5% level 23

25 (correlation coefficient of , p-value = 0.033). Similar results are found when the subsample from Australia is compared to both Sweden (correlation coefficient of -0.35, p-value = 0.01) and the U.S. (correlation coefficient of , p-value = 0.000) in which Australian firms have significantly higher disclosure at 5% and 1% levels respectively when compared with Swedish and U.S. firms. Therefore, the significant difference between Australian firms and those from other countries is the determining factor for the result found in the Chi-square test in Panel A. INSERT TABLE 3 ABOUT HERE 5.2 Firm-level factors Descriptive statistics Panel A of Table 4 provides descriptive statistics for continuous explanatory and control variables. SIZE is measured using the 2010 year-end total assets of the firms and is transformed using a natural logarithmic transformation. For other explanatory variables, the mean and median for PERF are 0.11 and 0.09 respectively. While for RISK, the mean and median are 0.59 and 0.59 respectively. The skewness of PERF and RISK are and respectively which does not suggest heavy skewness that require further transformation for regression purpose (Gujarati and Porter, 2009). Panel B of Table 4 shows the frequency count for all dummy explanatory (IND) and control variables (ASSURE and CDP). For IND (H3), the sample is classified into sustainably high and low profile industries. Within the sample, there are 86 (44.33%) firms in low profile industries and 108 (55.67%) firms in high profile industries. For the control variables, 63 (32.47%) firms have their reports externally assured by external parties (ASSURE) compared with 131 (67.53%) reports being not externally assured. In terms of the Carbon Disclosure Project (CDP), the majority of firms (75.26%) in the sample has responded to CDP s information request and provided information to the CDP. INSERT TABLE 4 ABOUT HERE Correlation matrix The Spearman correlation matrix is provided in Table 5. This correlation matrix provides the correlation coefficient for each variable, with the p-value presented in parentheses. The correlation matrix provides preliminary results as to whether there is any correlation between 24

26 GRI and the explanatory variables. Except for PERF (H4), the test variables show significant associations with GRI at either 5 or 10% levels. Correlation among explanatory variables is also examined to check for the presence of mutlicollinearity. As a rule of thumb, a correlation coefficient more than 0.8 indicates a problem of multicollinearity (Gujarati and Porter, 2009). In this study, none of the correlation coefficients have a value higher than 0.8. While the correlation test provides some evidence on the association between GRI and the explanatory variables, multivariate testing, discussed later, will be conducted to examine if there is any association after controlling for other explanatory variables and control variables. INSERT TABLE 5 ABOUT HERE Regression results Table 6 presents the regression results for Model (1) and (2). The results show that SIZE (H2) has a significantly positive association with GRI at 1% level (Estimate = 0.297, p-value = 0.001). This suggests that the extent of sustainability disclosure increases with firm size. This result provides support to H2 which is consistent with the findings in Gamerschlag et al., (2011); Christopher and Filipovic (2008); Clarkson et al. (2008) and Boesso and Kumar (2007). INSERT TABLE 6 ABOUT HERE Hypothesis 3 examines whether IND is associated with the extent of sustainability disclosure. The result shows that IND is positively related to GRI at the 10% level of significance (Estimate = 0.477, p-value = 0.084). This suggests that firm in sustainably high profile industries are more likely to disclose sustainability information at a higher GRI application level compared with firms in lower profile industries. Hence, the result is consistent with H3. This result supports to Newson and Deegan (2002) findings that industry is a significant factor in the extent of sustainability disclosure. Using their classification of industries, not only does the environmentally polluting industries, such as mining, utilises are found have higher disclosure, but also those firms in other sustainably sensitive industries, e.g. automotives. This supports that sustainability is of broader scope and it does not include only environmental issues, but also social and economic issues. In terms of the return on assets as an accounting measure of firm performance - PERF (H4) - no significant result is found in the regression model. Therefore, no support is found for H4. 25

27 This result is contradicting to Berman et al. (1999) s where they find return on assets is significantly associate with extent of sustainability disclosure. Hence, alternative measures of firm performance are examined later in sensitivity testing. Finally, there is a significantly negative relationship between RISK (H5) and the GRI at 5% level (Estimate = , p-value = 0.014). This suggests that firms with higher financial risk will have a lower probability to be in a higher GRI application level compared with firms with lower financial risk, which provides support for H5. This is consistent with Brammer and Pavelin (2008) but opposite to Reverte s (2009) findings. While Model (1) tests explanatory variables only, model (2) incorporates a number of controls that are likely to relate to the extent of sustainability disclosure. After incorporating control variables, there is a change in the results from model (1). Interestingly, the significant results found for the hypothesised explanatory variables (SIZE, IND, RISK) disappear, and only the control variables YEAR and ASSURE are significant, both at the 1% level. This suggests that firms which adopt the GRI Guidelines for a longer period of time and firms which have their report externally assured will have a higher extent of sustainability disclosure in terms of the GRI application level. These factors are more important in explaining sustainability disclosure than firm size, industry, and financial risk. The pseudo R squared shows that the incorporation of the control variables substantially increases the explanatory power of the model from 9.6% to 28.4%. These results indicate that firms which have more experience and more credibility in sustainability reporting have higher levels of disclosure, supporting findings in Woods and Colson (2003) and the purpose of the GRI Application Levels to provide a pathway towards continuous improvement of companies sustainability reporting (GRI, 2011b, para. Sensitivity analysis Further analysis is undertaken to check the robustness of the findings presented in the previous section. Sensitivity tests examine: (i) a range of sub-samples 7 ; (ii) the use of alternative measures of explanatory variables and (iii) a country interaction variable. Table 7 shows the results obtained for the subsample analyses. The first year adopters are excluded as they are 7 These include subsample (a) without first-year adopters; (b) without non-big 4 clients; (c) without loss firms and (d) without Swedish state-owned firms. 26

28 likely to have a lower extent of sustainability disclosure. Results show the explanatory variables still remain insignificant. Further, the exclusion of first year adopters reduces the significance of YEAR from 1% to 10% level. Nonetheless, YEAR and ASSURE are still significant and the direction remains the same as the main results. This suggests that first-year adoption is less likely to be impacted by firm-level characteristics and hence not motivated by the influence of stakeholder legitimacy in demanding sustainability information. A subsample of Big 4 clients is also examined as they are more likely to have better reporting practice than non-big 4 clients. However, the results show that the exclusion of non- Big 4 clients do not have an impact on the results as only the control variables YEAR and ASSURE are still significant at the 1% level. Loss firms are then excluded as they are likely to have different reporting practices. While YEAR and ASSURE are still significant at 1% level, RISK is found to have moderate negative significance with GRI. This suggests that, as predicted, firm with higher financial risk, but which still make a profit, are likely to have lower extent of sustainability disclosure. This further confirmed the conjecture that firms with higher financial risk are financially dependent on creditors and are more committed to provide financial information (Francis et al., 2008). A further regression is performed on a subsample which excludes state-owned Swedish firms, as these firms are likely to have different sustainability reporting practice due to mandatory reporting regulations. The regression results show that all the hypothesised explanatory variables are still insignificant and YEAR and ASSURE are still significant at the 1% level. INSERT TABLE 7 ABOUT HERE Further sensitivity analysis is conducted to examine if the results are driven by different proxies. For SIZE (H1), the natural log of market capitalisation is used. The results are still robust to results found in model (2) (unreported). For IND (H2), as an alternative proxy IND2 is used. Significant results are found for YEAR, ASSURE, and industry, whereby firms in oil, chemical and mining are providing higher extent of sustainability disclosure compared with other industries categories. This is consistent with the Halme and Huse (1997) study who find that firms in these industries are more likely to procedure higher sustainability disclosure as they are subject to more regulations. 27

29 For measure of PERF (H4), several alternative proxies are used, i.e. ROA after tax (PERF2), natural log of total revenue (PERF3), natural log of cash flow from operations (PERF4) and Tobin s Q (PERF5). Except for cash flow from operations, results found using other alternative performance measures are still consistent the main test, and are not significantly associated with the extent of sustainability disclosure. Interestingly, cash flow from operations is significantly related to GRI at 10% level. Therefore, the higher the cash flow from operations that the firm has, the more likely it will disclose a higher extent of sustainability disclosure. As earlier reported, the country of origin has a significant association with the extent of sustainability disclosure, GRI. This association is driven by the Australian firms in the sample. As such, a country dummy variable - AUS - is created to control for the effect of Australian firms. AUS represents zero if the sample firm is domiciled in Australia, one otherwise. AUS is also interacted with each of the hypothesised explanatory variables in separate tests to check for any interaction effect. After incorporating the AUS dummy variable, the results are still consistent with the main test results presented in Model 1. Moreover, consistent with the findings in the country-level tests, AUS shows positive significance at 5% level. This suggests that even after controlling for firm-level factors, Australian firms are providing a higher extent of sustainability disclosure compared with firms in the other three countries. We then interact AUS with other firm-level explanatory variables to see if there is any moderating effect by country. Except for IND, other interaction terms on firm-level explanatory variables with AUD have no effect on results of the main test. For the interaction between IND and AUS, it is found that the interaction term is negative and significantly associated with GRI. This suggests that Australian firms in high profile industries are more likely to disclose sustainability information at a higher GRI Application Level compared with Australian firms in low profile industries. This result is quite similar to the Newson and Deegan (2002) study in which finds both industry and country are important factors in association with extent of disclosure using a sample of Australian firms in comparison with two other countries. 6 CONCLUSION This study examines factors relating to the application level of the Global Reporting Initiative (GRI) Guidelines at both country and firm levels. Sustainability is now a global issue 28

30 that both government and firms are encouraged to commit further to in the pursuit of a sustainable environment for the next generations (United Nations, 2011a). To enhance stakeholder communication, the GRI implements a system of reportable GRI Application Levels so that reporting firms will be able to declare the extent of sustainability disclosure. The GRI Application Levels, which is based on the extent of disclosure across a range of GRI disclosure categories is believed to be a more sensitive measure of the extent of disclosure than previously adopted self-constructed disclosure indices (see for example Clarkson et al., 2008; 2011; Christopher and Filipovic, 2008) (Joseph and Taplin, 2011). The study first examines the issue at country level, where it is expected that differences in the cultural characteristics among countries lead to a difference in the societal value the country has, and consequently a difference in the degree of stakeholder-orientation (Van der Laan Smith et al., 2005). Second, the study examines the issue at a firm level where it is expected that sustainability stakeholders from firms that are larger (H2), operating in sustainably higher profile industries (H3) and are more profitable (H4) are likely to be more powerful and legitimate in demanding for sustainability information. Hence, these firms are more likely to disclose more sustainability information. Further, while urgency is also an important attribute that prioritises stakeholder groups, firm financial risk (H5) is also expected to be a factor, as it is expected that the demand of sustainability stakeholders will be less urgent compared with the demand of financial stakeholders for firms with higher financial risk. A sample of firms from Australia, Brazil, Sweden and U.S. are examined, and the study finds that the country of origin is a factor relating to the extent of sustainability disclosure. This supports Van der Laan Smith et al. (2005) study that aggregated cultural difference will lead to a difference in the degree of stakeholder orientation and hence the strength of the stakeholders attributes. Australian firms are found to have higher disclosure compared to other three countries of interest. However, tests on specific country characteristics show no association with disclosure. This finding in inconsistent with results found by Hope (2003) and Newson and Deegan (2002), who suggest that, respectively, the legal system, and economic status of countries affect the extent of sustainability disclosure by domiciled firms. At the firm-level, the extent of sustainability disclosure is higher for firms that are larger in size, operate in a high profile sustainability industry and have lower levels of financial risk as in 29

31 Newson and Deegan (2002) and Brammer and Pavelin (2008). However, these associations disappear when the model controls for the number of years sample firms have used the GRI Guidelines and whether their reports are externally assured. While prior studies adopt stakeholder theory and propose that size, industry and risk are likely to be factors associated with the extent of sustainability disclosure (see for example Christopher and Filipovic, 2008; Ho and Taylor, 2007), this study suggests that they are not as important as the number of years the firms have adopted the GRI Guidelines and the external assurance of the reporting. A number of sensitivity analyses are undertaken, including: a range of subsamples, the effect of alternative measures of firm size, industry and performance, and the implementation of a country interaction effect into model. Interestingly, while no significant association between the firm financial performance and extent of sustainability disclosure is found when performance is measured by return on assets, the extent of sustainability disclosure is associated with the proxy cash flow from operations. There are a number of implications of the results. This study suggests that stakeholder influence on the extent of sustainability disclosure is significant at country-level. At the firmlevel, while firm size, industry and financial risk are associated with the decision on the extent of sustainability disclosure, length of time the GRI Guidelines have been adopted, external assurance, and the availability of cash resources to commit to sustainability activities are more important. Therefore, both the GRI and governments should encourage initial take-up of sustainability reporting across all different types of firms. As long as firms adopt this reporting practice, the extent of disclosure will improve through time (Woods and Colson, 2003). In regards to the stock exchanges, they should impose higher sustainability disclosure requirement based on the available cash the firms have as it is found that firms with more cash should commit more in sustainability reporting practice. There are a number of limitations of this study. First, this study focuses on only four countries. While it is believed to be more comprehensive through the incorporation of countries with salient cultural differences, this study can be further expanded by incorporate further countries with different cultural characteristics. Further, this study focuses only on 2010 data. Even though it does provide an understanding as to what factors are related to the extent of sustainability disclosure at one point in time, one year of data does not allow an analysis of 30

32 changes in a firm s decision over time in relation to adoption of the application levels. Finally, the measure adopted for the extent of sustainability disclosure - GRI Guideline application level - is motivated by the view that it is a more appropriate proxy for the extent of sustainability disclosure than that measured by an index derived from content analysis (Joseph and Taplin, 2011). However, this proxy also has its limitations. It has been proposed that provides a standardised sustainability reporting framework that encourages a narrow and incomplete reporting practice that ignores other important sustainability information not required under the Guidelines (Milne, Ball and Gray, 2008) and fails to hold the reporting firms accountable for sustainability performance (Dingwerth and Eichinger, 2010). Future research in sustainability reporting could address the limitations outlined in the previous section. It could investigate additional countries in order to more comprehensively examine which specific country factors lead to the difference in the extent of sustainability disclosure using the GRI Guidelines. This study could also be expanded by using longitudinal data, which will be able to show the trend of application levels across time. This is particularly important given the number of years of GRI adoption has been found as a significant factor in determining the extent of disclosure. Finally, the application of the GRI Guidelines is only one measure that is readily available for investors in evaluating the extent of sustainability disclosure. Future research could investigate the application of the GRI as it continues to develop more comprehensively and across different sectors. 31

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39 Figure 1 Trend of the GRI Guidelines adoption using data provided by the GRI Number of firms adopted the GRI Guidelines from

40 Figure 2 Disclosure requirements of each GRI Guidelines Application Level 39