According to last year’s Global Competitiveness Report of the World Economic Forum, the United States produces the most wealth in the world. Even on a per capita basis, the United States ranks third, just behind finance-centric Luxembourg and oil-rich Norway. Yet this same study, based on a survey of business leaders in 125 countries, shows that when it comes to the stringency of environmental laws, the United States ranks 21st — far below what many would expect (or desire) for a country of its enormous wealth. Perhaps not surprisingly, these business leaders view the United States as a place where companies can easily avoid having to disclose information about their environmental activities and impacts.
Policymakers, economists and activists have long debated the connection between a country’s wealth and its environmental regulations. Some say richer countries can afford to take care of the environment and therefore enact more laws to limit emissions. Many argue that these laws are necessary, since left on their own, firms wouldn’t volunteer potentially negative information. Others counter that with incentives to increase transparency — such as cultivating a good public image, or even responding to consumer or investor pressure — firms would readily do so.
Prior research on the effects of government regulations on company disclosures have focused on the firm level, often comparing corporate behavior within two or three countries (particularly in rich countries, where the data were most accessible). Professor Bjorn Jorgensen, working with Naomi Soderstrom of the University of Colorado at Boulder, wanted to take the broadest possible look to determine what kinds of firms disclose information about their emissions. “We wanted to know if it is really true that companies in wealthy countries disclose more,” says Jorgensen. “And if so, we wanted to get an empirical sense of these firms’ motivations. Do they disclose more because they have to or because the marketplace gives them incentives to do so?”
The researchers’ global comparison found that companies in rich countries do, in fact, disclose more and that these countries also have more stringent regulations. To investigate the firms’ motivations, the researchers compared regulations and behavior on a country-by-country level from an accounting perspective.
“In Europe, there are rules that force firms to issue a lot of information about the environment in ‘green accounts’ or ‘green reports,’ often as part of their annual reports,” Jorgensen says. “The environment has become an element in their accounting system. In the United States, there is very little required disclosure of environmental activities and impacts. Most of the disclosures are completely voluntary.”
Previous studies by environmental economists have shown that requiring firms to disclose information will change the firms’ behavior: for example, a company might manage its releases of toxins to be right below a threshold, so it can avoid the PR fallout. “Many people have argued that disclosure in itself is worthless, since it doesn’t attempt to change the underlying cause but just lets people know what’s already happening,” Jorgensen says. “The counterargument is that you should care about how much firms disclose, because we know that in some settings disclosure affects firms’ decisions about how much to pollute. Disclosure may shame firms, in a way. It makes firms think about ways to change their production so that their image won’t be impaired.”
Comparative data, however, suggest that firms will not disclose this information voluntarily, no matter how wealthy the country and how much it could conceivably spend to limit emissions, Jorgensen says. And market pressure can’t function on its own; a certain degree of transparency from firms is required. “Although some industries, like oil and gas, have voluntary disclosures, governments can change company behavior — and also consumer and investor behavior — by requiring more disclosure,” he says. “By forcing a company to release this information, consumers and investors can make choices about whether they want to buy its products and shares, and thereby influence the firm.”
Jorgensen, Bjorn, and Naomi Soderstrom. “Environmental Disclosure Within Legal and Accounting Contexts: An International Perspective.” Working paper, Columbia Business School, 2007.
Bjorn Jorgensen is the Gary Winnick and Martin Granoff Associate Professor of Business in the Accounting Division at Columbia Business School.