Responding to the EU Emissions Trading Scheme and Climate Change Act: an empirical analysis of corporate longitudinal carbon disclosure strategy

This study is motivated by the introduction of mandatory carbon reporting by UK Government under the Companies Act 2006 (Strategic and Directors’ Reports). Before the enactment of this regulation, there are several carbon reporting guidance that aim to improve the reporting of carbon emissions by UK companies such as the Carbon Disclosure Project (CDP), GRI (2013), WBCSD and WRI (2004). This raises the question that why further governmental intervention is initiated in carbon reporting despite of the existing institutionalized reporting guidance. Using a self-constructed disclosure index, this paper attempts to assess the quality of the longitudinal development of corporate carbon emission disclosure, to study to what extent companies disclose their carbon emission information and to examine whether these companies are using carbon emission disclosures as a legitimacy tool in response to the launch of legally binding carbon reduction schemes such as the EU Emission Trading Scheme (EU ETS) and Climate Change Act (CCA). The sample comprises 25 companies from a population of FTSE 100 companies during the period of 2004-2012. In corresponding to institutional legitimacy theory and strategic legitimacy theory, our analysis reveals the gradual improvement in disclosures over the period, which reflects in the achievement of peak disclosures after the enactment of EU ETS and CCA. Companies with carbon trading account are more responsive to these schemes than those without carbon trading account, while the general disclosure improvement rate is lower. Nevertheless, the quality of the disclosure remains low and stakeholders’ expectation of corporate carbon disclosure is still unmet, which justify further government intervention of mandating carbon reporting. These findings provide evidence of how corporate carbon disclosure evolves in a specific way to meet the expectation of various stakeholders and have important implications for the government and top management who are interested in improving corporate carbon disclosure practice and disclosure strategies