Economic Analysis and Policy

Question: Discuss about the Economic Analysis and Policy. Answer: Introduction: Several researchers have tested their theories on the determinants of carbon disclosure. The results have suggested different factors involved. Most of theories are backed by shareholders impact. For instance, Le Luo (2014) have proposed to determine an effect of carbon tax on the market return of Australian firm and found that carbon tax has impacted negatively on the shareholders. The effect has also been varied on the basis of sectors, and financial industrial sectors have been affected greatly. The study suggested to take more prominent action regarding to the strategy in climatic change polices so as to contribute greatly in sustainable development. Figure 1: Carbon Risk management Source: Muftah M. Najah (2010) Increased Environmental Issues According to Aerts (2009) irrespective of the fact that the carbon risk management and activities related to its disclosure involves a voluntary participation and also a significant amount of financial resources, many companies are welcoming it and integrating these activities. This arises a need to study the reason of the accepting these activities willingly by such companies and the stakeholders who are influenced and involved by these activities. It has been stated along time back that the different types of pollution, which has been identified 15 in number and comes under the term climate change, has also been categorised as market failures or as negative external elements. Pollution has been termed as a negative element as it adds an additional negative cost to the process of production. This additional cost is in form of deterioration of property and human health, and this loss is not borne by manufacturers who manufacture the products and customers who consume it. Also, such negativity tends to be inefficient because the damage caused due to it is beyond the cost a company pays in order to take measures to prevent it (Botosan, 2012). The company is also not much keen to take any preventive action as it has to pay for the actions taken; while nothing is borne by them for the cost of pollution caused. This market failure forces the government also to intervene and compel the companies to evaluate the cost of the pollution caused. By executing this, the companies will also be eventually involved in the practice of preventing this problem from growing. In order to make companies evaluate the cost of climate change, carbon tax has been imposed, where the companies would be payable for the emissions produced by them. This would in return, incentivise all the firms which are emitting carbon to reduce it by introducing and utilising eco-friendly activities and technologies (CDP 2009). In order to explain the non-financial and financial phenomenon, two theories named as socio-political theories and economic-based theories have been used in the initial research. The socio-political theories, also known as stakeholders theory and legitimacy theory, asserts the assumption that the disclosure behaviour is a result of the political and socio pressure, the stakeholders provide (Clarkson et al. 2008). Figure 2:Carbon Regression Source: Muftah M. Najah (2010) Legitimacy and Stakeholder Theory The legitimacy theory, on one side, emphasises on the fact that an organisation has been functioning by adhering to the standards provided under the social contract, where the two parties involved are the community and the organisation. Hence, the organisation tries to attain legitimacy which the community provides. The company will frame various strategies to keep its legitimacy retained, if it feels that it is in danger. While, the stakeholders theory, on the other side, asserts that a management cannot exercise any decision without considering the interests of the stakeholders. For them, the stakeholder satisfaction should be the most important consideration if they are working in the framework of the stakeholders. Therefore, the companies, now days, are taking all the necessary actions to meet the stakeholders expectations as they have understood that they can have a significant impact on the performance of the company (Deegan, 2009). Due to the pressure faced by the companies from political and social elements, they tend to develop a negative association between the predicted disclosure and performance. This means that a company with more unhealthy or unsatisfactory environmental performance will more disclose information which will be non-verifiable as compared to the companies who are performing well. By studying this, it can be rightly said that these theories considers the factors which lets any company disclose specific information. The legitimacy theory states that the company has to disclose more information so that they can retain their legitimacy in the community while the stakeholders theory states that the company undertakes performance actions so that they can meet particular stakeholders expectations, who keep the capability of impacting companys performance (Deegan, 2009). Voluntary Disclosure Theory The economic-based disclosure theory emphasises that the performance of a company is a vital factor of disclosure behaviour. The signalling theory states that the companies with good performance shows good signals in their results so that they can get more advantage, influence the point of view of external factors about its companys image and reduce the imbalance of information between the external factors and the company (Cho, 2007). The voluntary disclosure, on the other hand, asserts on the disclosure of the verifiable information by all well performing companies which distinguishes them from the non-performing firms. The well performing and superior organisations have a greater responsibility to disclose the relevant information when following activities of carbon risk management as compared to the inferior companies. Also, the carbon legitimacy proxy was not found relevant. Thus, it was concluded from the outcomes that with the other factors in control, the pressure faced from the political and social elements did not compel the companies to disclose information related to carbon (Clarkson, 2011). Constraints in Empirical Study The disclosure of the climate change at a corporate level has been gaining a significant attention from research point of view. The study researched on the following aspects: Disclosure of the opportunities and risks of climate change Disclosure made to the questions of questionnaires of CDP Disclosure of climate change in the sustainability and annual reports Conceptual Model: Hypotheses Impact on capital markets transactions/information symmetry, by voluntary disclosure through Carbon Disclosure Project. Proxy Measures for Theoretical Constructs Theoretical Construct Proxy measure Dependent (DV), Independent (IV), or Control Variable (CV) Source Industry Industry Revenue Independent variable Market Capital Capital Investment Control Variable Research Method: The research aims to investigate the industry specific determinants of carbon disclosure and it can be best achieved by conducting qualitative analysis based research. For collecting the data, different types of firms working in different types of industries would be taken into account. The data will be collected from GRI reports on sustainable development. The data will be analysed through inductive analysis of the content derived from the GRI reports. The graphical data collection to explain the project impact will be used in the study for getting clear facts and figures of impact on CDP project. References Aerts, W Cormier, D 2009, 'Media legitimacy and corporate environmental communication', Accounting, Organizations and Society, vol. 34, no. 1, pp. 1-27, Beatty, T Shimshack, JP 2010, 'The impact of climate change information: new evidence from the stock market', The BE Journal of Economic Analysis Policy, vol. 10, no. 1, pp. 1- 27. 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