The Materiality of Environmental Information to Users of Annual Reports

Abstract

The provision of environmental information in corporate annual reports is predominantly voluntary in Australia. Despite this, a number of research studies have observed the presence of environmental information in the annual reports of sample companies (for example, Guthrie and Parker, 1990; Gibson and O Donovan, 1994; Deegan and Rankin, 1996; Deegan and Gordon, 1996). These prior studies have found that where firms disclose environmental information they tend to only provide information which is favourable to their corporate image. Within the prior studies this lack of objectivity is typically viewed in a negative vein. However, this negativity is premised on the generally unstated assumption that environmental information is material to annual report users.This paper reports on the results of a survey of various groups of annual report users as to the importance, or "materiality", of environmental information to decisions they may wish to make. The paper also investigates how environmental information is ranked in importance relative to various other items of social and financial information. The user groups surveyed comprise shareholders, accounting academics, stockbrokers and financial analysts, financial institutions, environmental lobby groups, industry associations and other groups performing a review or oversight function.The results indicate that the majority of the annual report users surveyed believe environmental information to be material to their decisions, and that they seek the disclosure of this information in corporate annual reports. Although the results show that the users typically believe that environmental information is material, the results further indicate that the majority of the user groups rank environmental information behind traditional financial information such as profits, net assets, cash flows, and dividend payments.

JEL Classification: M40, M46