Environmental disclosures and corporate attributes, from the lens of legitimacy theory: a longitudinal analysis on a developing country

1. Introduction

Due to radical climatic changes, the business world is going through tremendous pressure from various stakeholders to behave responsibly toward society (Liesen et al., 2017). Within a very short span of time, climate change has gone from bad to worse (Benlemlih et al., 2020; Bose et al., 2018; Chowdhury et al., 2020; Liesen et al., 2017; Luo and Tang, 2014; Masud et al., 2018; Nurunnabi, 2016). Society started realizing how important it is to disclose environmental activities performed by committed corporate citizens. Therefore, environmental reporting is gaining significant attention in today’s globalized and competitive business arena than it had been in the past (Benlemlih et al., 2020; Liesen et al., 2017). Due to climate changes, natural disasters like drought, flood, cyclones and earthquakes have become common phenomena, and scientists identified changes in temperature and rainfall causes because of a growing amount of carbon emission and degradation of ecosystems (Lee, 2007; Becker et al., 2020). This situation has affected people’s livelihoods, society, culture and health worldwide and threatens global economic growth, sustainable development and poverty reduction. Nurunnabi (2016) mentioned that as per UN Framework Convention on Climate Change (UNFCCC), thousands of underprivileged people would face scarcity of fundamental needs such as food and water and are prone to critical diseases. Nurunnabi (2016) also stated that developed countries have already enforced a few laws where all the companies enlisted in Stock Exchange are bound to disclose their environmental activities where failure to comply may cause a considerable penalty. Developing countries also follow their footprints.

Like many other countries, climate change has become a significant concern for Bangladesh since, geographically, Bangladesh is located in the most vulnerable position. According to Masud et al. (2018), the country has to bear a heavy price if the situation remains stagnant. It is estimated that the annual loss would be 2–9.4% of the Gross Domestic Product by 2050 and 2100, respectively, while the country is itself responsible for less than 0.35% of global carbon emission. Therefore, it is high time that global leaders and corporate citizens work together toward “Green” and “Sustainability” (Masud et al., 2018).

Ideally, companies are expected to disseminate carbon emission and other environmental-related information to the public (Li et al., 2018; Liesen et al., 2017) because companies can be both causes and solutions for carbon emission and other environmentally hazardous activities (Li et al., 2018). Due to a wide range of information asymmetries, stakeholders will not get the actual environmental performance of a firm unless firms take measures to let them know (Belal et al., 2015; Li et al., 2018).

Environmental reporting refers to any financial or nonfinancial disclosure made by firms on their business’s social and environmental effects and remains mostly a voluntary activity (Hossain et al., 2017; Parker, 2005). It has become increasingly relevant to enterprises. Environmental disclosure practices have become an essential issue in the development process to ensure environmental protection. The rapid growth of industries in our country has helped to raise economic development, but at the same time, it has brought many environmental problems, and these problems led to a conception on the natural well-being is in danger such as global warming, pollution of water, air, soil, etc. (Qureshi et al., 2012).

Environmental reporting studies documenting Bangladesh fail to click a longitudinal picture of environmental disclosure practices of corporations after the enforcement of Bangladesh Bank Green Reporting Guidelines 2011. Nurunnabi (2015) found that Environmental Disclosure Practices of Bangladeshi Corporations at their naive stage (only 2.23% disclosure) and expressed expectations that strict enforcement of regulatory pressure may boost the disclosure trend.

Moreover, numerous studies have been investigated focusing on corporate social reporting practices from a legitimacy perspective. But the studies were limited either solely to the banking industry (Islam et al., 2020) or manufacturing industries like tobacco (Tilling and Tilt, 2010), minerals (Deegan and Blomquist, 2006), chemicals (Milne and Patten, 2002), etc. Li et al. (2018) argued that there had been very scant literature focusing on the determinants of green disclosures integrating environmental legitimacy. Hardly any study investigated corporate legitimacy by analyzing environmental reporting covering a wide range of industries in a single frame which is essential to draw a generalized statement. Therefore, the study is an attempt to mitigate the research gap taking into consideration all financial, manufacturing and service-providing industries like cement industries, shipbuilders, steel industries, telecommunication industries, Internet service provider firms, power distribution companies, tobacco companies, agro-based industries, pulp and paper mills and jute processing companies.

The legitimacy theory sets the tone of the paper. The theory states that firms must have some accountability to society, and firms should act responsibly and maturely to meet investors’ and the general public’s expectations (Gregory et al., 2016; Joshi et al., 2011). To gain enormous social acceptability and credibility, firms should meet society’s diverse needs and thus act as legitimate corporate citizens (Deegan, 2019; Li et al., 2018).

More particularly, the strategic legitimacy perspective has been applied to focus on positive environmental disclosures while carrying out the research. The reason is embedded in the fact that the strategic legitimacy aspect sheds light on the desire and motivation of the firms to earn social support where firms spend resources and try to exert control to attain social acknowledgment (Comyns, 2016; Yingjun et al., 2015). Such corporate citizens disclose positive environmental activities in their annual report as a modus operandi to communicate with vast social groups and are highly reluctant to disclose any adverse information; perhaps their reputation falls at stake.

The study follows annual reports as a data source and some industry-specific adjustments as a data coding method. Total of 345 annual reports with a span of five years ranging from 2015 to 2019 of listed financial and nonfinancial institutions of Bangladesh are used for data analysis in the legitimacy theory setting to answer the following research questions.

The present study investigates the extent and quality of environmental disclosures practiced by listed firms in Bangladesh. Furthermore, a self-constructed checklist of 12 green disclosure items has been prepared by analyzing annual reports and identified a list of green activities which are highly disclosed and are least disclosed both by financial and nonfinancial institutions. The study also seeks to test whether corporate attributes such as firm size, firm’s age, human resource, leverage ratio, profitability, presence of independent directors in the board and gender diversity can influence green disclosures made by companies practicing in Bangladesh.

The novelty of the research stems from the fact that the study has taken into consideration the longitudinal trend of environmental disclosure practices after the enforcement of Bangladesh Bank Green Reporting Guidelines 2011, which is the first of its kind in the research of environmental disclosures. The study makes several contributions to the existing literature on environmental disclosures. First, the study will add a new dimension to the current literature by covering a wide array of industries in a single frame. Ahmad (2012) surveyed 40 Chartered Accountants of 40 publicly listed firms in the year 2010. He found that respondents strongly feel the need for a mandatory regulatory framework to enhance the environmental disclosure practices in annual reports. A similar study was conducted by Nurunnabi (2016) on 71 leading corporations for the fiscal year 2010–2011 and found an abysmal level of environmental disclosures (on an average 2.23%). Ahmad (2012) and Nurunnabi (2016) expressed deep expectation of the fact that enforcement of the first-ever mandatory regulatory framework, Bangladesh Bank Green Policy Guidelines 2011, will enhance the extent and quality of environmental disclosure practices of banks and other financial institutions and also indirectly boost up environmental disclosure practices of all nonfinancial publicly listed firms but studies to analyze the longitudinal trend of environmental disclosure practices after enforcement of the Bangladesh Bank Green Policy Guidelines 2011 has hardly been observed.

Thus a significant contribution of the present study is to demonstrate the effectiveness of Green Policy Guidelines 2011 in shaping corporate behavior toward environment disclosures through longitudinal analysis. Besides, the study conducted an in-depth analysis to understand the most favored form of environmental exposures (narrative/quantitative/monetary) and their extent after incorporating regulatory guidelines, which is the first of its kind in the research of environmental disclosures.

The study also addresses corporate attributes, which have influencing power for accelerating environment-related disclosures. Panel data regression analysis shows that both financial and nonfinancial institutions, which are larger in size and have higher leverage ratios, tend to disclose environmental information since they are confronted with legitimacy pressure from a diverse group of stakeholders and society. The paper is divided into six sections. Section 1 introduces the paper, Section 2 includes the underpinning theory, literature review and hypotheses development, Section 3 contains the research methodology, Section 4 presents analysis and findings, Section 5 discussions, Section 6 managerial and theoretical implications and Section 7 sheds light on the future avenue for research.

2. Underpinning theory, literature review and hypotheses development

Archel et al. (2009, p. 4) consider that “the legitimacy theory is a mechanism that supports organisations in implementing and developing voluntary social and environmental disclosures in order to fulfil their social contract that enables the recognition of their objectives and the survival in a jumpy and turbulent environment”. Legitimacy theory has gained enormous acceptability in social accounting and disclosure-based research that has invaluable contribution to unearthing the goals and incentives of revealing environmental disclosures (Chowdhury et al., 2020; Islam et al., 2020; Joshi et al., 2011). The theory mandates that organizations have some obligations toward society and firms’ activities are affected by the behavior of community in which it operates (Comyns, 2016; Yingjun et al., 2015). Therefore, to gain acceptability and credibility in society, firms should act responsibly and maturely (Gregory et al., 2016; Li et al., 2018). According to the legitimacy theory settings, organizations should not merely focus on meeting the expectations of investors. Instead, it should consider the rights of the general public (Joshi et al., 2011). Joshi et al. (2011) also opined that organizations strive to build a strong congruence between social values offered by their behavior and the norms of expected behavior. Any mismatch between the two may create potential threats in the form of economic, legal or other sanctions. Recently, there has been a global concern for environmental issues, and as a developing country, Bangladesh is no exception. Economic liberation and deregulation of industries have created more awareness among the Bangladeshi nation concerning environmental issues; therefore, we may expect that there is increased disclosure of environmental information in companies’ websites and annual reports to gain organizational legitimacy (Guillamon-Saorin et al., 2017; Joshi et al., 2011). Legitimacy theory can be categorized from two different perspectives: strategic and institutional. Strategic legitimacy includes resources and control that an organization exerts to attain social acknowledgment (Comyns, 2016; Yingjun et al., 2015).

Furthermore, strategic legitimacy illustrates organizations’ desire and motivation to earn social support. Legitimacy offers inspiration to the firms to maintain a reputed position and status in the society and to feel the reactions of observant from the society (Kaium Masud et al., 2017) to legitimacy pressure; companies tend to disclose positive rather than negative information. As a part of legitimacy, environmental disclosures act as an influential catalyst of a company to share a strong and credible relationship with society (Comyns, 2016; Gregory et al., 2016; Guillamon-Saorin et al., 2017; Hossain et al., 2020; Luo and Tang, 2014; Masud et al., 2018; Nurunnabi, 2016). Therefore, both developed and developing countries are now reporting their environmental performance in their annual reports, websites and other forms of publications to mitigate legitimacy pressure vested upon them and to improve public perception (Gregory et al., 2016; Hahn and Lülfs, 2014; Yingjun et al., 2015). Institutional legitimacy is considered a set of fundamental beliefs. For instance, institutional dynamics, which stem from the industry environment in which a firm operates, generate external pressure on companies to behave in a perceived legitimate way by external institutions. In this sense, companies possess minimal control over society’s perception (Hahn and Lülfs, 2014).

On the contrary, an interesting observation revealed by Hahn and Lülfs (2014) that disclosing adverse events by the firms does not necessarily mean that firm is gradually losing its credibility among stakeholders. Instead, it sends a positive message to the market, signaling proactive and honest disclosures and acts as a risk mitigation tool, whereas not reporting negative aspects might conversely lead to speculation that the report is overly optimistic, whitewashed and hence not a reliable source of information (Reimsbach, 2013). The legitimacy theory sets the tone of the paper. More particularly, the strategic legitimacy perspective has been applied to focus on positive environmental disclosures while carrying out the research.

3. Research methodology

4. Analysis and findings

To fulfill the first research question, “What is the trend and quality (narrative, quantitative and monetary) of green disclosures made by the Listed Financial and nonfinancial institutions from 2015–2019?”, the authors have analyzed the published annual report to usher the trends and quality of environmental disclosures which are projected in the following graph (see Figure 1).

The figure sheds light on the environmental disclosures trend of listed firms operating in Bangladesh for five years spanning from 2015 to 2019. The trend analysis shows a steady trend with a slight deviation meanwhile. From 2015 onward, almost 50% of the sample firms publish their contribution toward the environment either in the narrative, quantitative, monetary, or adopting three approaches simultaneously. The narrative approach is the most favored disclosure approach, followed by quantitative and monetary environmental disclosures. On the contrary, such disclosure practices in annual reports were scanty before Green Banking Rules 2011. Therefore, it can be recapitulated that the enforcement of Green Banking Rules 2011 positively influences commercial banks’ environmental or green disclosures. Simultaneously, commercial banks encourage other industries through green financing, green product and green policy to accelerate environmental disclosures in the annual report.

To satisfy the research question “What are the items (content) of Green disclosures made by listed Bangladeshi Companies in 2019?”, the authors have reviewed the annual reports of 2019. The following graph presents the disclosed items.

Figures 2–4 show that tree plantation (85%) is the most favored environmental disclosure practiced by firms. Therefore, it can be implied that firms invest most in tree plantations to perform their ecological commitment. Furthermore, firms also showcase the use of renewable energy and green management policy through their disclosures to let the stakeholders know about their responsibility toward a greener world. As a result, 79% of sample firms publish their investment for renewable energy and 77% of firms prefer to reveal how they embrace green policy to run their internal management. Moreover, many firms (71% of sample firms) highlight how they facilitate green infrastructure projects or green finance. On the contrary, the most neglected environmental disclosure item is fund allotment for climatic changes. Among 69 representative firms, only 24 firms disclose their contribution or fund allotment to face various natural disasters or climatic changes. In addition, the firm’s policy toward carbon management policy is also not up to a satisfactory level. Our committed corporate citizens should also facilitate more training programs to make their employees aware of the significance of green policy and its implications. Simultaneously, firms accused of harming the environment in the form of air, water or land pollution should develop technology to minimize their harmful effect and save nature from inevitable extinction. With the authors’ best knowledge, investigation to detect the environmental activities that are disclosed mainly by the firms and which items are least disclosed in the context of Bangladesh is the first in its kind in the history of environmental disclosure research and the context of Bangladesh. Therefore, the study adds value to the existing literature by mitigating the current research gap and stimulating future researchers to work further in the same field.

To investigate the answer to the last research question, “Do corporate attributes have any impact on green disclosure practices made by listed financial and nonfinancial institutions in Bangladesh?”, two regression analyses were conducted for financial and nonfinancial institutions (see Table 2).

The regressions are conducted taking EDI as a dependent variable. Two regression models have been developed to carry out the study. The first model is designed for financial institutions and the second model is for nonfinancial institutions.

The regression results show that the two regression models are significant at a 5% level as the F value of the models are 4.83 and 12.924, respectively, suggesting that corporate attributes have an impact on environmental disclosures of both types of firms. The R² under the first model is 0.172, which indicates that the model can explain 17.2% of the variability of environmental information disclosure in the sample companies in the study. Furthermore, R² under the second model is 0.356, which implies that the model can explain 35.6% of the variability of dependent variables for nonfinancial institutions. The adjusted R² for the first regression model is 13.6%. For the second regression model, the value is 32.8%, indicating that more explanatory independent variables have not been considered in the model. The VIF of independent variables is less than 10, which means there is no multicollinearity problem, and sample data fit multiple regression.

The coefficient value of the first regression model shows that firm size, leverage ratio and Human resource cost have passed the significance test at 0.05 level. Among these three independent variables, firm size and leverage ratio have a significant positive relation with EDI, whereas human resource cost (HRC) negatively relates with EDI. However, contrary to our expectations, age of the firms, profitability, independence of board decision and gender diversity in board did not pass the significance. Therefore, it can be concluded that in financial institutions, profitability, age of the firms, gender diversity, and presence of more independent directors in board composition do not impact environmental disclosures made by firms.

The coefficient table of the second regression model (Table 3) shows that firm size and leverage ratio have a significant positive association with EDI. The age of the firm offers a negative relation with EDI. On the contrary, gender diversification has a positive role on the dependent variable. Other variables such as profitability and the presence of independent directors have no relationship with EDI.

5. Discussions

The paper explores the environmental disclosure practices of the publicly listed firms of Bangladesh from the legitimacy theory perspective. A longitudinal analysis has been conducted over 345 annual reports ranging from 2015 to 2019 to gauge the extent of environmental disclosure practices of corporations through effective enforcement of Bangladesh Bank Green Policy Guidelines 2011. Environment-related disclosures are further categorized into three levels: Narrative, Quantitative and Monetary Disclosures to get a narrower view of disclosure trends. The findings suggest that there is a radical improvement in corporate attitude toward environmental reporting. Before the enforcement of Bangladesh Bank Green Policy Guidelines 2011, the disclosure level was poor. During the year 2010–2011, only 2.23% of corporations published their environmental performance as documented by Ahmad (2012), Bose et al. (2018) and Nurunnabi (2016).

In contrast, in 2015, almost 50% of the sample firms published their contribution toward the environment in the annual report either in the narrative, quantitative, monetary form or adopting three approaches simultaneously. The rate has been consistently maintained in subsequent years. Thus, it can be recapitulated that enforcement of Green Banking Rules 2011 and other circulars of Bangladesh Bank positively influence the environmental disclosures of commercial banks. The finding is consistent with Bose et al. (2018), who argued that strict enforcement of mandatory regulations issued by the Central Bank is the only effective mechanism to encourage environmental disclosure practices. Nurunnabi (2016) also concluded in a similar tone when they conducted a survey in the year 2010–2011 and expressed their urge for a mandatory regulatory framework that is essential to increase environmental disclosures and reshape corporate behavior toward the environment.

The longitudinal analysis also revealed that the narrative approach is the most favored form of environmental disclosure. Quantitative and monetary conditions of disclosures are also well-practiced as the minimum disclosure rate during the sample years is 48% and 40%. The finding is consistent with (Llena et al., 2007), who argued that narrative disclosures are the most common form of companies and stated that quantitative and monetary information was not very popular since the beginning of environmental reporting practices. But strict enforcement of mandatory regulations may stem the practices. Llena et al. (2007) also added that companies are increasingly paying attention to quantitative and monetary forms of disclosures.

Further, to answer the second and third research questions, content analysis has been conducted on the authors’ compiled checklist of 12 items of environmental disclosures to compute EDI. Based on the EDI, most disclosed and least disclosed environmental reporting items had been identified. The investigation to address the most favored and neglected areas of environmental reporting items is the first of its kind in Environmental Disclosure research and the context of Bangladesh. Therefore, it will add significant insights to the existing research and offer new avenues for future research. The result revealed that listed companies mainly emphasize tree plantation and forestry-related disclosures (85%) in annual reports, implying that firms invest most in tree plantations. Many sample firms (55 out of 69) report renewable energy performance and reveal how they embrace green management policies (53 sample firms) to run their internal operations. Thus, disclosure on Renewable Energy and Green Management Policy took the second and third ranks of most favored environmental reporting items. The finding is consistent with Masud et al. (2018), who argued that Green Finance and Green Management policy are priority areas of environmental reporting of banks, and banks are increasing disclosures in these two areas. The present study also illuminates that the most neglected environmental reporting item is fund allotment for climate change and carbon management policy. Masud et al. (2018) expressed their frustration in a similar vein and stressed practicing and reporting on these components because they are labeled the most crucial weapon to combat global warming and the atrocity of climate change. In addition, disclosure rates regarding employees training and customer awareness are also very scanty compared to their merits.

The present study also attempts to examine the impact of corporate attributes on the environmental reporting practices of firms. The analysis revealed that firm size and leverage ratio positively impact environmental reporting for financial and nonfinancial institutions. By the legitimacy settings, large companies disclose a higher volume of information on their websites because they are more accountable to the public regarding environmental activities. Such disclosures often create a platform to gain social appreciation. Moreover, for more prominent companies, this information may already have been collected for internal reporting and decision-making. Hence, they can easily communicate it to external stakeholders by publishing it in their reports. But small firms may have limitations of resources to collect ample information and disseminate it to the public. The finding is also supported by Chowdhury et al. (2020), Islam et al. (2020), Joshi et al. (2011) and Gray et al. (2001). The study also found a positive relationship between the leverage ratio and environmental disclosures for financial and nonfinancial institutions. Bangladesh Bank makes it mandatory for all commercial banks to comply with Green Banking Rules 2011. All the financial institutions have to abide by the enforced regulations of the country’s central bank. As a part of this mandatory regulation, commercial banks follow Green Finance Policy and impose environmental safety dimensions while approving loans and grants to borrower institutions.

Consequently, levered companies disclose environmental information due to the regulations of financial institutions than non-levered companies. Moreover, companies with high debts tend to establish a good rapport with their interest groups and are more likely to reveal their environmental activities. The finding is aligned with Clarkson et al. (2008), who also posited a positive relationship between leverage and level of environmental disclosures. The study observed a mixed relationship between environmental disclosures and the age of firms for financial and nonfinancial institutions. Age is an indicator to measure firms’ financial stability and maturity. Findings demonstrate that in the case of nonfinancial institutions, age has an inverse relationship with environmental disclosures. It implies that younger firms want to be legitimate for their stakeholders and establish their reputation in the market. Such firms intend to incorporate environmental safety measures and investment in green policies to manage funds from external sources such as commercial banks. But the age of firms does not influence environmental disclosures of financial institutions because all the financial institutions regulated under Bangladesh Bank are bound to follow Green Banking Rules 2011 in operating their business and publish annual reports accordingly. Akbas (2014) and Joshi et al. (2011) concluded that the age of a company is unrelated to the extent of environmental disclosure. The present study also shows that profitability does not influence environmental disclosure practices. Chowdhury et al. (2020), Yusoff and Lehman (2009) and Liu and Anbumozhi (2009) also found no significant relationship between the profitability of firms and environmental disclosures. The result explains that companies are providing the environmental information mainly to alleviate the concerns from the government and to avail myriad benefits such as Tax Rebate, Green Finance, etc.

A vast majority of investors do not find environmental reporting information relevant for their investment portfolios (Joshi et al., 2011; Liu and Anbumozhi, 2009). However, the interest of stakeholders is slowly growing; thus, more firms will opt for opening environmental information. The regression result of the present study also showed that independent directors do not exert any influence on environmental disclosures; the finding is consistent with (Terjesen et al., 2016). Terjesen et al. (2016) posited that independent directors are responsible for overseeing the board activities and protecting the minorities. Their presence in board meetings will ensure lawful, transparent and credible board decisions in all material aspects, including environmental contribution and environmental reporting of firms. However, the finding was reversed entirely. After a thorough investigation, they found that the presence of nonexecutive or independent directors does not contribute any effectiveness to a corporation’s attitude toward the environment (Terjesen et al., 2016). Guenther et al. (2016) and Dinca et al. (2019) argued that companies investing more in human resources also reported environmental issues elaborately. The negative relationship between human resource cost and environmental disclosures practices of financial institutions is a remarkable finding of the study, which interprets that banks and other financial institutions who spend more on human resources suffer from a lack of resources for social and environmental activities. Due to resource constraints often, these types of firms are compelled to prioritize their choices. However, it is a matter of hope that the government of Bangladesh has taken initiatives to incentivize corporate houses in different forms such as tax rebate, financial remuneration, award, etc., which may lead to a rapid change in the current scenario. On the contrary, the study obtained an inconclusive relation between human resource costs and environmental disclosures for nonfinancial institutions.

Furthermore, the study shows that female directors do not exert influence on environmental reporting in the case of financial institutions. It can be deduced from the finding that the Central Bank strictly monitors the financial institutions of Bangladesh to comply with the Green Banking Rules 2011. Therefore, all the commercial banks disclose environmental contributions regardless of the board composition. On the contrary, in the case of nonfinancial institutions presence of female directors in board composition has a positive impact on environmental disclosures. The finding is consistent as opined by Elmagrhi et al. (2018),Gyapong et al. (2016), Nasr and Ntim (2018) and Shahab et al. (2018) that if the number of female directors can be enhanced in board composition, they can play an active role to strengthen board attitude toward environmental responsibilities.

6. Managerial implications

7. Future avenues of research

Notwithstanding the observations mentioned above in the study, the current research acknowledges a few limitations of the study. First, the study observed that the R² value of regression models is low, indicating that few other vital variables could have been considered. Hence, a better conclusion could be drawn. Although the limitation may not affect the findings, further research may be warranted to navigate the field in a narrower approach. Future research may also take into consideration whether environmental disclosures provide long-term benefits for stakeholders. Although the study demonstrates the extent and quality of environmental disclosures, an in-depth analysis could also identify why certain items are least disclosed. For instance, the study observed that fund allotment for climatic changes; carbon management policy is the few least disclosed items. Future research may consider how corporations will earn social appreciation and motivation by investing in those least preferred items in the legitimacy theory setting. A comparative analysis among the environmentally sensitive industries may provide valuable insights to address any differences among the most disclosed and least disclosed environmental initiatives taken by them.