Effects of the Design of Environmental Disclosure Regulation on

Oct 5, 2010 - Focusing on the potential of information regulations, this article aims to contribute to ongoing efforts of policymakers to improve poli...
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Environ. Sci. Technol. 2010, 44, 8022–8029

Effects of the Design of Environmental Disclosure Regulation on Information Provision: The Case of Israeli Securities Regulation DORIT KERRET,* GILA MENAHEM, AND RINAT SAGI The Department of Public Policy & The Porter School of Environmental Studies, Tel-Aviv University, POB 39040, Ramat-Aviv, Tel-Aviv 69978, Israel

Received July 13, 2010. Accepted September 8, 2010.

Focusing on the potential of information regulations, this article aims to contribute to ongoing efforts of policymakers to improve policy tools, in light of the increasing complexity of assessing the environmental impacts of new technologies and industrial corporations. Using the annual reports of corporations and performance data from the Ministry of Environmental Protection, the study analyzed the quality of responses to the amendments of Israel’s Securities Regulations by major, publicly traded, polluting industrial corporations in Israel. The main theoretical claim of this paper is that within mandatory regulations there may be a large variability in the degree of specification of requirements. When considerable discretion is left to corporations, the result is a mixed mandatoryvoluntary regulation regime. Our findings suggest that such variability impacts the implementation outcomes, as responses to environmental requirements depend on the level of discretion. Facilities increased their reported information, including the negative aspects, when specific mandatory prescriptions were stipulated. However, voluntary motivations did not result in the provision of information when corporations were allowed a high level of discretion. The authors recommend the delineation of exact stipulations of prescriptive requirements for the provision of comparative environmental information inordertoobtaintheenvironmentalinformationdeemednecessary.

Introduction What are the best ways to increase the effectiveness of existing policy tools to achieve better environmental results? The increasing complexity of ever-changing environmental effects forces policymakers to craft the most effective mix of policy tools to improve environmental results (1). Information regulation is one attempt to craft advanced policy tools that may empower additional actors and result in significant environmental improvements (1-3). However, for information regulation to be effective, it has to result in the provision of relevant accurate information (4). As positive information is more readily disclosed, our focus is on potential negative information (bad news) as well as hard, objective, quantitative, and comparable information. Previous studies have acknowledged the flaws of voluntary environmental disclosure, highlighting the poor confidence in the data provided (5, 6). At the same time, mandatory * Corresponding author phone: 972-3-6409516; fax: 972-36407382; e-mail: [email protected]. 8022

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requirements have also been widely criticized for not yielding complete and necessary information (5, 6). The present study aims to shed light on specific aspects of these challenges by evaluating how the design of mandatory regulations impacts the effectiveness of information policy tools. We claim that mandatory regulations vary in their design and that certain attributes of such regulations may account for better results, while others may not. We are especially interested in those attributes that enhance “bad news” as well as quantitative information that allows objective evaluation, as these are of specific importance to a large range of stakeholders (representing economic as well as social interests). Furthermore, we claim that mandatory regulation often includes areas of wide discretion, leading in fact to a mixed mode of mandatory-voluntary regulation that may affect the environmental information provided. Specifically we claim that the same limitations that have been discerned when discussing voluntary approaches may also hold for the disclosure of negative information when discussing unspecified or vague requirements within mandatory regulation. Our theoretical framework for studying the design of information regulation draws from the debate within the legal literature regarding the desirable design of securities regulation. The present article is analytically structured as follows: We first highlight the various stakeholders’ needs for environmental information, specifically for the provision of both quantitative, comparable information and negative information (bad news). We then present theories regarding the voluntary motivations of organizations to provide environmental information. We suggest that none of these theories provides a viable explanation for the provision of negative information in the absence of specific regulatory requirements. In order to put the Israeli case in a comparative context, we briefly discuss several cases of recent information regulation in three countries that demonstrate the unspecified or vague requirements within mandatory regulation and the effect of specific prescriptions on the provision of “bad news” information. Our analytical strategy in examining the Israeli case was to investigate the response of corporations to the amendments through information provided in their annual securities reports, before and after the amendments, as well as data collected by the Ministry of Environmental Protection (MEP) regarding aspects of the corporations’ environmental performance. Our analysis illuminates how differences in the design of regulations may affect the self-reporting of useful information to stakeholders. Our data provide evidence that voluntary motivations are not strong enough to elicit both comparable and negative environmental information in the Israeli case study. Regulatory Structure, Motivations for Environmental Reporting, and Stakeholders’ Interest in Environmental Information. The significance of environmental information to various stakeholders has been reported in the literature and acknowledged by industry (7, 8). Quantified, accurate information is also required by shareholders and affects the value of corporations (9, 10). As Williams (11) extensively analyzes, today a substantial and growing subset of (both economic and social) investors consider environmental disclosure to be substantial information. However, for this information to be valuable and useful it should be comparable, of high quality, precise, and complete, for otherwise it does not accord with the SEC objectives of protecting the investors (9). The GRI index is an example of an attempt to have such information provided voluntarily (10). 10.1021/es102361k

 2010 American Chemical Society

Published on Web 10/05/2010

As information regulation will not be useful if it does not provide the necessary information for action, one prominent question remains: How should securities regulations be designed to serve as an effective policy tool that enhances the provision of high-quality, quantitative, and comparable environmental information, including negative information? More specifically, we refer to the degree of discretion within prescriptions in the regulations’ design - should it only provide the general framework for reporting (principle-based regulation), or should it provide detailed and clarified requirements (rule-based regulation)? Whether securities regulation should be principle-based or rule-based is debated in the legal literature. Many of the major arguments relate to the relative certainty of rules and flexibility of principles and the costs of these regulatory choices for regulation promulgators, enforcers, and followers (12). In empirically considering the pros and cons of each approach, Feller (13) presents examples of the heterogeneity in environmental disclosures provided by U.S. companies when regulation was principle-based. He calls for closing the existing loopholes in regulations and warns against the consequences of leaving securities regulation requirements vague and unclear. By contrast, Ford (12) discusses the general nature of securities regulation (without specifically referring to environmental requirements) and calls for principle-based securities regulation. He claims that rule-based regulation sends out the message that even “responsible actors may take advantage of loopholes, perhaps even with a clear conscience”. He further claims that a rule-based system will not address the inclination of those industry actors who actively seek to avoid regulatory requirements. Even Ford, however, concedes that the success of a principle-based approach to securities regulation depends on the incentives to industry and the regulators to follow the framework and that in some cases strict rules are required. In view of the complexity of the cons and pros of each of the approaches to regulation, in order to advance toward desirable designs a deeper understanding is required of the mechanisms inherent in each design that may lead to intended or unintended results. In this study we attempt to understand how various designs of mandatory regulation operate. We suggest that mandatory regulation in the form of principle-based regulation allows for relatively wide discretion - leading, in fact, to a mixed mode of mandatory-voluntary regulation and therefore leaving room for voluntary motivations. Hence, we look into the research literature on voluntary motivations for the disclosure of quantitative and “bad news” environmental information in order to gain a better understanding of how they may shape corporations’ mode of operation in a context of mixed mandatory designs that allow for wide discretion. One of the most prominent approaches to understanding industrial environmental motivations for behavior is the “license to operate” theory of Gunningham et al. (14). They explained corporate behavior as a response to a ‘license to operate’ (14) and suggested thinking of stakeholders as representing expectations or requirements in the form of terms or conditions of such a license. The variety of external pressures that influence corporate environmental behavior is divided into three broad categories according to the main groups of stakeholders: economic (shareholders, banks, customers), social (local community, NGOs, and the general public), and legal (regulators, legislators, citizens, and NGOs seeking to enforce regulations). We use this categorization of different terms of a license to operate to discuss the different kinds of motivations for environmental disclosure, as presented in the following theoretical accounts.

Economic Considerations for Disclosure. Disclosure is an economic term in the corporations’ licenses to operate, as it is costly. It can impose the costs of measuring and verifying the desired information as well as collecting and publishing it (15). Therefore, economically motivated voluntary practices of reporting depend on the cost-effectiveness considerations, which depend in turn on the pressures different actors exert upon the corporation - the additional terms in the licenses to operate (15). In view of such economic constraints, several theoretical accounts offer explanations for corporations’ additional motivations to disclose environmental information. Economic considerations that support voluntary disclosure are empirically supported by Clarkson and others (10), who demonstrate that best performers will provide quantitative environmental information to differentiate themselves from other companies. However, the economics-based voluntary disclosure theories suggest that, at best, only the superior environmental performers will reveal quantitative environmental information in the case of nonspecific requirements. They do not provide support for general motivations to disclose environmental information. Socio-political theories explain voluntary reporting by corporations, while focusing on the interaction between corporations and various stakeholders. The mainstream socio-political theory is the ‘stakeholder theory,’ which suggests that corporations respond to the requirements of interested parties (8, 15). Complementing the stakeholders approach, legitimization theories argue that voluntary disclosures serve business’s need to legitimize its behavior and pertain to its good reputation and social license to operate (8). Yet the motives suggested by these socio-political theories do not secure the provision of negative, or potentially negative, ‘bad news’ information or general quantitative reporting. The voluntary information disclosed will be positive and qualitative (10, 15, 16) and may vary in its quality and might also be irrelevant or even misleading (10). Therefore, these theories do not point to inducements for general quantitative and negative information disclosure by corporations. One possible theoretical account that may provide an explanation for voluntary reporting of negative information is the “shame and fear” theory (17), which suggests that what affects people may not be information itself but rather an inconsistency between information and prior expectations. Inconsistency may arise when firms fail to report negative information that stakeholders have acquired in other ways. On the basis of the “shame and fear” thesis, it may be hypothesized that, at the very least, corporations should not be expected to report positive information regarding their performance and compliance status when contradictory information regarding their noncompliance is available. In addition, they may voluntarily disclose negative information to prevent any shock effect of inconsistency between such information, if revealed, and previous expectations that rested on its absence or being withheld. Motivations for Compliance with Mandatory Regulation. When analyzing the impact of regulatory design on the disclosure of information, it is important to take into account the inclinations toward compliance with mandatory environmental reporting, in addition to theories regarding voluntary reporting. The regulatory license to operate represents the pressure exerted by legal stakeholders, based on regulatory demands and their relative strength. Gunningham et al. (14) demonstrate that boosting the intensity of regulatory demands led to improved environmental performance (14). The tightening of regulatory disclosure requirements may reduce both the perceived and actual economic costs of the license to operate, as it provides a uniform frame with which VOL. 44, NO. 21, 2010 / ENVIRONMENTAL SCIENCE & TECHNOLOGY

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all firms must comply. It may also enhance the social license to operate and therefore induce even further environmental reporting. Jimenez et al. (5) take a different view of compliance with mandatory information regulation, from an impression management perspective. They contend that, due to the difficulty companies have dismissing mandatory information regulation, they conceal their noncompliance by providing ritualistic disclosures. According to the impression management theory, companies will choose to disclose vague, general, and irrelevant information, as long as such disclosure might convey the impression of compliance with regulatory requirements. Analytically combining the impression management theory with the legal literature debate over rules vs principles suggests that, under clear and detailed disclosure rules, it may be more difficult for corporations to engage in concealment and ritualistic disclosure. For instance, stating that a specific company did not have any significant environmental impact will not generate an impression of compliance when the company is specifically required to provide emissions quantities of certain materials. It could, however, create such an effect if the company is only generally required to report significant factors that affect the environmental conditions. This theoretical review suggests that voluntary motivations for the disclosure of comparable, quantitative environmental information as well as negative “bad news” information are not very strong. Therefore, rule-based regulation would seem to be required to enhance environmental disclosure, while regulation leaving large latitude for interpretation may not result in the desired information. Before presenting our case study, which examines these propositions, the next section places the Israeli case in a comparative context. Comparative Evidence of Information Disclosure Response to the Introduction of Mandatory Regulation Requirements. The significance of the comparative analysis lies both in identifying general dilemmas of environmental disclosure in securities regulations and in pinpointing problems that are more contextual. Using three recent examples of the introduction of mandatory requirements for environmental disclosure, in Spain, Australia, and the U.S., it corroborates the argument presented above, namely that once mandatory securities regulation leaves extensive latitude for interpretation, it results in poor reporting practices. As will be shown, the regulatory designs in those cases lack specific requirements to report quantitative information and leave such reporting to the discretion and voluntary motivations of corporations. However, the addition of specific requirements to provide negative information resulted in increased reporting of such. We analyze the reported results of implementing these designs, which contain such mixed components, to place the empirical examination of the Israeli case that will follow in a comparative context. The Australian regulations in 1998 introduced an explicit requirement to include within companies’ annual reports their performance in relation to environmental regulations (6). However, the Australian requirements do not specify any mandatory format and components of such reports. Nor do they specifically require the provision of comparative, quantitative information, as discussed above. In response to these regulatory requirements, Australian companies expanded their disclosures concerning breaches of environmental regulations. Frost, however, detects a large variability in the details provided by companies. While some only very generally describe their performance, others use quantitative and comparative indicators in reporting their violations. Nonetheless, Australian companies also did not disclose hard, objective, comparable environmental data. Spanish mandatory disclosure requirements present an interesting case, as there have been two recent attempts to 8024

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promulgate disclosure requirements, with differing results. The first attempt to regulate environmental disclosure came in 1998 and resulted in poor compliance, in particular in no provision of “bad news” information despite a requirement to report on contingent liabilities (18). An improved, much more comprehensive and detailed version of mandatory requirements was promulgated in 2002 and resulted in greatly enhanced disclosure, in particular in a significant increase in the reporting of bad news (19, 20). The Spanish case therefore highlights the significance of studying the different consequences of mandatory environmental requirements, particularly that improved reporting is not an apparent result of the introduction of mandatory disclosure requirements. Still, the Spanish requirements do not include any obligation to provide quantitative, comparable information. The only potential negative requirements in the 2002 Spanish standard are disclosures of environmental provisions and environmental contingencies. Unlike the Australian case, there are no requirements to provide general compliance information. U.S. SEC disclosure requirements also do not require the provision of quantitative, comparable environmental information. Hughes (21) presents empirical evidence to support his hypothesis that annual report disclosure increased in response to additional disclosure requirements. A larger number of companies provided information in response to greater specification of the content of a particular disclosure requirement (SAB 92 regarding contingent environmental liabilities). Such information may be considered bad news. Although Hughes does not focus on the reasons for increased reporting, his research provides further evidence for the provision of additional information in response to additional regulatory prescriptions. This brief presentation of recent attempts to introduce mandatory regulation shows that, in fact, the new designs of mandatory regulations contain areas that allow for considerable corporate discretion, not specifying any demand for negative or quantitative information and relying on voluntary motivation to elicit such information. While the above studies found that the introduction of mandatory environmental reporting enhanced reporting levels, researchers did not examine the effect of differing prescribed degrees of discretion in reporting regulations on the resultant reporting practices of corporations, specifically on their inclination to provide negative “bad news” and quantitative information. That is the specific aim of the study reported here. The (2004) Amendments to the Israeli Security Regulations Regarding Environmental Disclosure. The Israeli Securities Regulations were amended in 2004 following recommendations by the Barnea Committee 2001, which reassessed securities disclosure practices. Arguably, the addition of a prominent ‘environmental protection’ section within the regulations was the most important element of the 2004 amendments. The three prominent traits of the amendments, which also differentiate them from previous requirements, lie at the focus of the research reported and its hypotheses. The first trait is the shift from implicit demands to explicit requirements to provide environmental information. While the essence of reporting requirements has not changed (i.e., report any significant information that may affect the value of the corporation), the amendments emphasize the requirement to provide environmental information by creating a specific section that addresses environmental issues. This change allows us to examine the extent to which the introduction of explicit requirements may impact reporting, as compared to the former situation when requirements were implicit. In addition, the amendments require disclosure of additional information, such as the influence of future

regulations. These facets of the amendments have enhanced the regulatory license to operate under Israeli environmental regulations. In the Israeli case, the introduction of explicit requirements for environmental reporting may signify increased cooperation between the MEP and the Securities Authority as well as the greater importance of environmental reporting in the view of the Securities Authority. In that sense, the introduction of the new amendments may enhance the regulatory license to operate not only through the requirements themselves but also by strengthening their enforcement, as the Israeli Securities Authority enjoys high standing. The amendments’ second trait is the specific requirement to disclose information of a potentially negative nature. Here, corporations are required to disclose, in specific detail, legal proceedings as well as monetary expenditures (including expenditures as a consequence of noncompliance or polluting behavior). Therefore, at least some of the required additional information is of a negative nature. Still, the current regulations are far from specific, as they do not require reporting any form of quantitatively comparable environmental information (such as emissions and discharges or environmental risks). Thus, the absence of specific quantitative requirements is the third trait we focus on. In other words, the regulations are currently formulated as principle-based regulations, leaving extensive room for interpretation and therefore for voluntary disclosure motivations. When the above theoretical framework is applied to the Israeli case, it appears that the current Israeli securities regulation takes the form of a mix between rule-based and principle-based regulation. Furthermore, as our paper analyzes the effects of the amendments on reporting practices, contextual changes between the periods under study, which may affect the information reported, should either be taken into consideration or ruled out. For instance, an increase in MEP enforcement capacity might explain the rise in information provided, as additional relevant information was made available. Yet there was no significant improvement in MEP enforcement capacity between the periods analyzed, and it remains very low relative to other Western countries (2, 22, 23). Indeed, the already low MEP budget only shrank. More specifically, the 2008 State Comptroller Report (24) revealed that MEP enforcement capacity dropped between 2003 and 2006 according to selected representative parameters (e.g., the number of investigation files dropped between 2003 and 2006; the total number of imposed fines fell by 50%). This information is directly relevant to our reporting period and shows that MEP enforcement capacity does not explain a potential rise in the reported items. Furthermore, no significant environmental regulations were introduced during this period that could explain the rise in reported information. Additionally, changes in the general transparency policy may have a contextual effect on reporting practices. As Li et al. (25) have found, the disclosure level is related to stakeholders’ potential knowledge regarding environmental data from different sources. However, there was no significant change in this regard between the relevant periods, and, indeed, the disclosure level remains low. Furthermore, it remains difficult to obtain relevant information through the Freedom of Information Act in Israel, and currently there are no additional environmental reporting obligations (2, 24, 26). Similarly, voluntary environmental corporate disclosure remains highly underdeveloped in Israel. To date, only two Israeli companies have produced social and environmental reports, and no industrial company has produced a Global Reporting Initiative report - a voluntary reporting scheme (27).

Taking into consideration the theoretical discussion together with the background of the Israeli case study, in light of the weak theoretical support for strong enough voluntary motivations, we propose the following hypotheses. With regard to the effect of the regulatory license to operate and rule-based regulation, we postulate the following: HA: Following the amendments, the negative provided information within the specified regulatory context (rulebased regulation) will increase due to the enhancement of the regulatory license to operate. With regard to the effect of principle-based regulation that leaves latitude to corporations to decide whether or not to disclose “bad news” or quantitative information, we postulate the following: HB1: The provided quantitative, comparable information will not increase, as it was not specifically required by the regulations (principle-based regulation). HB2: In the absence of specific mandatory requirements (principle-based regulations), facilities will not report their environmental violations unless they are specifically connected with litigation processes.

Methodology Sample. In order to capture as many environmental aspects as possible, we searched for corporations that are (a) publicly traded and (b) have the highest environmental impact in the country in terms of pollution. In order to create the most representative list of such companies, we cross-referenced the major air-polluting companies (IPPC companies provided by the MEP) with publicly traded companies. Since most of the highly polluting companies in Israel are privately owned, we identified and studied all 22 publicly traded companies defined as highly polluting. Thus, our data are categorized according to 462 reporting variables for each of the two reporting periods. Data. Two sources of data were used: (1) annual reports of the corporations to the Securities Authority in the preand postamendment periods and (2) data from the MEP regarding violations of air emissions standards. Annual reports for each company were obtained from the Securities Authority Web-accessed database, where corporations are required to upload their annual reports. The research corpus consisted of two types of documents: (1) a preamendment annual report for each sample company for the 2003 fiscal year (March 2004) and (2) a postamendment annual report for the 2006 fiscal year (March 2007). Content analyses were performed on each corporation’s reports according to two main categories - mandatory requirements and environmental performance information. This allowed us to identify changes in reporting patterns and to discern the effects of prescriptive vs discretionary requirements (Table 1). Information on mandatory requirements is delineated according to the specific sections of the regulation and was therefore used to test our hypotheses regarding the effects of mandatory requirements on corporate reporting practices. The 13 items in the “mandatory” category were divided into three subcategories as shown in Table 1: (1) legal requirements - details regarding environmental requirements and compliance status; (2) expenditures - for environmental purposes differentiated by compliance status; (3) enforcement - litigation and administrative procedures. At least some of these items have the potential of providing negative information. However, in order to be more specific, each information item was categorized as either positive or negative information. The categorization reference point was environmental improvement. That is, each case of environmental improvement (even if it cost money) was marked as positive, while indications of violations, noncompliance, or any manner of harm to the environment were marked as negative. Neither a positive nor a negative score was assigned VOL. 44, NO. 21, 2010 / ENVIRONMENTAL SCIENCE & TECHNOLOGY

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TABLE 1. Number of Reported Items by Variables and Category no. reports category mandatory: legal requirements expenditures

enforcement

mandatory - total number of reported items environmental performance information (EP)

variables

2003

2006

legal requirements compliance with legal requirements expenditures for pollution control equipment, to be in compliance expenditures for pollution control equipment; future compliance expenditures aimed at meeting future regulationsa operating costs remediation costs general losses (not related to litigation). present litigation potential litigation litigation settlementsa administrative and criminal enforcement proceedings environmental risk

5 3 3

22 22 19

1

14

0 1 2 1 6 2 1 2 3 30 0 0 0 3 1 0 1 0 3

7 7 7 1 9 3 5 8 7 131 4 3 1 15 12 4 13 2 54

energya GHGa watera air land and water other discharges or releasesa waste natural resources and conservationa

EP - total number of reported items a

Subject not reported in one of the years.

b

Subjects not reported in both years.

in cases of unequivocal meaning (e.g., indication of regulations to which the corporation was subject). Since our main interest is the provision of negative and quantitative information, we did not use word count methods, as these methods may obscure the true nature of information. The extent of the information provided should not be connected with its negativity. Furthermore, quantitative information is not necessarily wordier. Information that is highly quantified may take the concise form of tables and numbers and should not be correlated with word number. It should be noted that, although the items specified in this category are based on Israeli regulations, many of them are compatible with the Wiseman Index (21, 28). This similarity is not surprising, as the Wiseman Index follows the basic reasoning of the U.S. Securities Regulations. Indeed, in many ways the Israeli Security Law resembles U.S. regulations (29). The second main category includes selected information regarding ‘environmental performance’ [EP]. In essence, this category is similar to Wiseman’s “pollution abatement” category, refined here to include recent developments in EP indicators research, developed by Clarkson et al. (10). Information regarding EP relates to our theoretical discussion in two ways. First, EP information provided by corporations in their reports was related mainly to the mandatory requirements. For example, corporations reported that air emissions dropped due to the installation of a particular technology or that they had been forced to invest in environmental solutions as they exceeded the required regulatory sewage standards. The initiative to divulge such information could be the result of changes in the mandatory environmental disclosure requirements. However, some of the EP-related information provided could be regarded as voluntary reporting, since the amended regulations did not require reporting it. Specific quantitative information (e.g., quantities or concentrations of emissions) is particularly valuable as environmental data, because it can provide stakeholders with comparative tools, given the relative nature of quantitative information. Such information 8026

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was not required by the securities regulations and was therefore used to test HB1 regarding voluntary disclosure. Data analysis was undertaken by combining all of the corporations’ reported items into a single composite list, subdivided into pre- and postamendment periods, and computing the differences between the two periods in terms of numbers of reported items, both collectively as well as within the different categories. Since we had 21 potential reporting variables for each corporation, for each year, the collective data pool includes 462 items for each reporting period. This rich collection of data served as the basis for the examination of our hypotheses with reference to the general impact of regulation on reported environmental information. Table 1 presents the structure of the analysis in terms of these categories and descriptive data on the reported items, by corporations, for both periods. These data constitute the basis for the statistical analysis. In addition to the sample corporations’ annual reports, our analysis included MEP information regarding their violations of air emissions standards. This information was gathered in order to assess corporate reporting of violations in annual reports. (Reliable data regarding violations of emissions standards are only available for 2006.) Given that all IPPC facilities have to submit periodic reports regarding emissions to the MEP, this information should have been entered into the MEP electronic database known as the “Air Emissions Inventory” [AEI]. However, interviews with MEP Air Pollution Officers reveal that not all the relevant data have been systematically entered into the system. In addition, Air Pollution Officers reported that spot inspections have revealed much higher emissions by the inspected facilities than in the periodic self-reported emissions data. These observations suggest that each reported AEI violation is at least as severe as it seems and that the lack of information regarding violations in the AEI should not be taken to imply company compliance with air emissions standards. Furthermore, since our hypothesis is based on the “shame and fear” theory, we restricted our reported data to unequivocal violations. Therefore, we referred either to violations of

TABLE 2. Differences between Reporting Periods in Percentage of Reported Items (Out of Potential Items) reported items 2003 hypothesis HA

HB1 a

category mandatory-related legal requirements mandatory-related enforcement Mandatory-related expenditures mandatory-related EP mandatory-related negative information voluntary quantitative comparable information

N 8 14 8 5 19 0

2006

%

N

18.2% 12.5% 6.1% 2.8% 4.1% 0%

43 32 55 43 62 0

% 100% 29.1% 41.7% 24.4% 13.4% 0%

chi square value a

60.923 8.906a 46.054a 34.833a 25.021a

DF

potential items

1 1 1 1 1

44 110 132 176 462 80

Results are significant at the 0.000 level.

emissions that exceeded the standard by over 100% in a specific inspection or to violations in at least 50% of all reported inspections.

Results HA - We Tested HA Using Only the Information Capable of Being Influenced by Regulations’ Mandatory Requirements. All the items in the “mandatory” category and all the items within the EP category were found to be related to the mandatory category (hereinafter: mandatory-related EP). We compared the percentage of reported items in the pre- and postamendment reporting periods in all subcategories. As our focus is on the provision of negative information, we specifically compared the number of reported negative items in the pre- and postamendment periods. Table 2 demonstrates that there is a statistically significant increase in the number of reported items in the postamendment period in all subcategories, in particular in the negative information provided. These results support our hypothesis that increased regulatory requirements for negative information result in an increase in the negative information reported. These results highlight the effect of mandatory requirements, as it is less convenient for corporations to provide negative information. HB1 - Voluntary Quantitative Information. Only the EP category was employed to test HB1. This enabled us to compare the number of reported items included in any form of comparable, quantitative information between the preand postamendment periods. We found that none of the corporations provided any comparable, quantitative information in either reporting period (Table 2). These results support HB1, as they indicate that corporations refrained from providing any meaningful comparable, quantitative environmental information regarding their EP in the absence of any specific reference in the regulations. HB2 - Reported Emissions Standards Violations. Testing HB2 was conducted by comparing violations indicated in the MEP data with the 2006 annual reports of the corporations studied. No data regarding emissions were available for four corporations. According to the MEP data, there was no deviation for three of the remaining 19 companies. Thus, based on the partial data available, 84% of the corporations were in noncompliance according to their own reports. Of the 14 companies with significant violations, nearly 50% (six companies) claimed specifically to be in full compliance (although information about their deviations was available in the MEP data). Examples of their statements are presented in the SI. These findings support HB2 that facilities will not be motivated enough to reveal their violations due to “shame and fear” motivations.

Discussion The theoretical focus of the current paper has been on the debate regarding the more effective design of environmental

TABLE 3. MEP Data on Air Emissions Standards Violations and Reported Violations in Annual Reports corporation code name

extent of violations according to MEP dataa

specified reported violations in annual report

A B C D E F G H I J K L M N O P Q R S T U V

high high none medium none high medium high high no data for 2006 none high high no data for 2006 high high no data for 2006 high high high high no data for 2006

none none none none none none none none none none none none none none none none none none none none none none

a High - emissions exceeded the standard by over 100% in a specific inspection, or there were violations in at least 50% of all reported inspections. Medium - emissions exceeded the standard yet were below the “high” threshold. None - according to available information, emissions were below the standard.

disclosure requirements in securities regulation, namely whether securities regulation should be principle- or rulebased. Following that debate, we argue that leaving significant room for discretion within mandatory principle-based regulation constitutes, in fact, a mixed mode of regulation. Within this mode, lenient motivations for voluntary disclosure may not ensure the provision of negative and quantitative information, and corporations are likely to refrain from providing such information. Our analysis shows that while the 2004 amendments to the Israeli securities law stress the importance of environmental reporting regarding significant effects on business performance, they do not provide any specific guidelines regarding the reporting of comparable, quantitative information concerning aspects of a corporation’s performance. As expected, and as the results demonstrate, companies adopted a lenient interpretation of the amendments. Furthermore, information regarding EP indicators was related solely to environmental compliance and expenditures and did not provide any quantitative evidence on emissions levels or environmental performance. VOL. 44, NO. 21, 2010 / ENVIRONMENTAL SCIENCE & TECHNOLOGY

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Results from comparative cases provide evidence that this reaction is not unique to the Israeli context. The U.S., Australian, and Spanish SEC regulations also did not include requirements to disclose quantitative, comparable information. When regulation has not been specific about providing information of either a negative or comparative nature, such information has not been voluntarily provided. These findings are in accordance with Gunningham’s (2003) license to operate and demonstrate that, in the absence of legal requirements delineating the specificity of the information to be provided, corporations tend to withhold such information. Furthermore, as our data demonstrated, when principle-based requirements do not specifically require the provision of information regarding the violations of standards, a concealment effect results. Facilities reported that they were generally in compliance despite the available data to the contrary. Arguably, the economic license to operate may prevent willing corporations from divulging EP information if peer corporations are not obligated to do so by legal requirements and if the costs of producing such reports exceed the benefits (14, 16). Furthermore, our results demonstrate that “fear and shame” motivations, which in the literature are said to enhance the inclination to provide negative information when such information may be easily obtained by stakeholders, were not strong enough in the case study to encourage voluntary reporting of negative environmental compliance information. Even though the negative information could indeed be obtained from the Ministry of Environmental Protection, none of the corporations revealed the significant noncompliance information available to them, and some even went so far as to praise their supposed compliance in annual reports. Certainly, it should be acknowledged that the insufficient effect of “shame and fear” motivations may be contextual, in view of Israel’s de facto poor transparency policy. Indeed, in comparison to other Western countries, general transparency regulations as well as their implementation are relatively weak in Israel (2). Furthermore, due to the relatively low environmental capacity in Israel, facilities may consider their social license to operate to be relatively lenient and may not fear the reaction of societal stakeholders. In support of such a contextual effect, we could cite the variability of compliance information provided by Australian corporations. However, further research is required to determine whether “shame and fear” motivations may not be sufficient to encourage facilities to voluntarily report their violations. In contrast to the poor provision of information in the absence of clear requirements, our results show that the explicit and specific requirement to provide information of a potentially negative nature resulted in increased reporting of negative information (Table 1). These findings are compatible with previous studies (6, 19) and therefore reaffirm the hypothesis that specific mandatory regulatory requirements affect the level of environmental disclosure in a variety of contexts. Examining the impact of regulation that requires information disclosure in the challenging Israeli context may provide more substantiation for the role of a regulatory license to operate. This is due to the fact that a great deal of the observed results can be attributed to the amendments, much less to other factors such as increased environmental capacity or transparency regulation, as no changes regarding these factors occurred between the two research periods. While the general requirements are important in all contexts, they are particularly so in the context of low capacity. In a low capacity context we do not see much variability in reporting practices in terms of voluntarily providing negative 8028

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or quantitative information, whereas in a high capacity context we observe some variability in the reporting practices. More importantly, in a low capacity context the information provided within SEC regulations may be the only available hard environmental data. Our findings and those of comparable case studies, along with their theoretical grounding, support recommendations to provide clear mandatory requirements for the provision of comparable, quantitative environmental information, especially when such information may have negative implications. If regulations are to encourage the provision of specified environmental information, or of any kind of comparable, quantitative data, they should state so directly. That is, specific information regarding emissions and potential environmental risk should be required, and this requirement should be stated in a clear and explicit manner. The requirement for such information is particularly important in countries where environmental information is missing and where there are none or limited transparency practices for providing environmental information.

Acknowledgments The authors would like to express their gratitude to staff members at the Ministry of Environmental Protection for their cooperation in this research and in particular to Shuli Nezer, Head of the Air Quality Division, and Valerie Brachia, Deputy Director for General Planning & Policy as well as to the Ford Foundation for funding this research. The authors are listed in alphabetical order.

Supporting Information Available Environmental disclosure requirements and statements of facilities regarding their compliance within their annual reports. This material is available free of charge via the Internet at http://pubs.acs.org.

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