“Keep your eyes on your own paper” may not be the most effective directive when it comes to reaching ESG goals. New research shows that companies that compare financial data against their peers tend to perform better from an environmental standpoint.
“Learning to be green: Accounting comparability and environmental violations,” a recently released study by the University of York School for Business and Society, reveals that comparisons in accounting allow companies to gain helpful insights from their better-performing contemporaries. According to Dr. Agnieszka Trzeciakiewicz, an accounting and finance lecturer and co-author on the report, assessing accounting information “can help firms to learn from each other about best practices and consequently reduce their environmentally harmful practices.”
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“Our study finds that with the tools we already have in place, we can already achieve quite significant change,” she said. Specifically, research found that comparing financial statements, including disclosures about how much money firms are spending on environmental violations, leads to fewer violations overall. “Environmental violations relate to firm activities which have been investigated and found to be in violation of environmental regulations by regulators,” the study said. “Since environmental violations are costly for both the firm and society at large, the identification of determinants of environmental violations is important.”
Accounting comparability allows companies to identify winning strategies, learn from each other’s mistakes and identify the specific root causes of environmental violations. They can then take targeted action to reduce risks and financial liability, all while improving their ESG performance. Researchers found that the downward trend in environmental violations generated by greater accounting comparability is “amplified in the presence of companies with better environmental performance, suggesting that firms are better able to learn from peer firms with low environmental impact.”
Assessing accounting can also provide a more accurate picture of a company’s environmental performance than their own ESG disclosures, as companies tend to put their best foot forward for shoppers and stakeholders, the study asserts. The losses firms incur due to legal liability, regulatory oversight and reputational damage are often outweighed by the short-term economic gains of operating in ways that don’t benefit the environment, and the cost of developing more sustainable processes has hindered progress.
“Firms… use the ESG (environmental, social and governance) claims as greenwashing and do not make fundamental changes to be more socially responsible,” researchers wrote. “In this respect capturing firms’ environmental performance through its ESG disclosures is prone to self-selection bias where firms self-select the information that they disclose.”
The study was facilitated by the Violation Tracker database, developed by Washington, D.C.-based public watchdog group Good Jobs First. The tool gives users access to wide-ranging and detailed information on corporate environmental violations gathered by U.S. regulatory agencies. Researchers merged the database’s insights with reported data from 588 companies from 2001 to 2020, amounting to 8,685 firm-year observations. “From our perspective as academic researchers, this resource has the potential to provide really positive change, as it gives us the data we need to easily identify environmental violators and hopefully help to stop the worst of corporate misconduct,” Trzeciakiewicz said.
As global companies grapple with the implications of European legislation that will introduce new standards for environmental impact reporting, she believes corporate accounting could provide useful insights to speed up compliance. “Current regulatory efforts in Europe are directed towards imposing more sustainability disclosure requirements on firms,” she said. “While these hold the promise of delivering benefits for both companies and society, they will likely create significant costs for the firms, which will need to hire experts to carry out additional assessments, put new procedures in place, and possibly implement changes if environmental impacts are found to be too high.”
“The effects of focusing on accounting comparability won’t be as significant as those of the new regulations coming in, but it helps firms to learn from each other about environmental performance, without incurring large costs,” Trzeciakiewicz said.
