Corporate Climate Change and Environmental Disclosures: Readability, Determinants, and the Way Forward

Abstract

This thesis empirically examines the determinants driving the extent and readability of climate change and environmental disclosures (CCED) made by Saudi-listed companies. Growing concerns surrounding climate change have increased institutional pressures on companies to improve their performance and transparency in addressing climate related issues. As a result, CCED in company reports have become increasingly important for stakeholders. The clarity and readability of these disclosures are critical to their effectiveness, as they enable stakeholders to make informed decisions and enhance corporate legitimacy. This thesis considers the above issues through the lenses of neo-institutional theory, legitimacy theory and the resource-based view.
This thesis utilises quantitative methods (robust random effect and robust ordinary least squares models) on a sample of Saudi companies listed on the Saudi Exchange from 2017 to 2022. This thesis measures CCED using the MSCI index. The MSCI index provides data on climate change disclosure, environmental disclosure and carbon disclosure. The readability of CCED is assessed using the Bog Index, based on data manually collected from the annual and standalone reports of Saudi-listed companies. The Bog Index evaluates the readability of reports by focusing on their plain English attributes. Additionally, other readability indexes are also considered for comparison.
Three empirical studies are conducted within the scope of this thesis. The first empirical study has two main aims: first, to evaluate the extent of climate change disclosures of companies in recent years, and second, to identify the determinations of such disclosures in a developing country context. Using a sample of 102 Saudi-listed companies from 2017-2022, this study reveals that the average climate change disclosure is 45.5%, with a slight upward trend observed over the last three years. Further, the study shows that the presence of female directors and government ownership positively influence companies’ commitment to and transparency in addressing climate change issues.Contrarily, traditional governance mechanisms, such as independent directors and the presence of environmental and sustainability committees, are not related to climate change disclosure. Additionally, the study identifies other practices, including employee environmental training at various organizational levels and establishing carbon reduction targets such as net zero, as important factors in enhancing companies’ approach to addressing climate change. Finally, this study shows that the impacts of these practices, along with the presence of female directors, are more pronounced among companies with government ownership. The second study examines the association between board gender diversity and CCED readability by considering specific attributes of female directors. It utilizes a robust random effects regression estimation approach to test the research hypotheses on a sample of Saudi-listed companies for the 2017-2022 period. The findings are consistent with neo-institutional theory and the resource-based view in that, with increased interest from stakeholders in CCED, the readability of Saudi companies’ CCED improves over the study period, with board gender diversity playing a significantly positive role in enhancing the readability of such disclosure.Further, the findings reveal that the positive association is driven by specific attributes of female directors. Female directors with a financial background, with a sustainability and environmental background, or holding a degree from a university in a developed country are positively and significantly associated with more readable CCED. Moreover, female directors with cross-directorships in countries with high environmental performance are positively associated with CCED readability. Unlike prior literature, which has focused on foreign directors, this study finds that Saudi female directors significantly and positively influence the readability of CCED.

The third study empirically examines how directors' education influences CCED readability. The study analyses directors’ educational data at the firm level over the 2017-2022 period. The results provide empirical evidence that the sustainability of universities where the directors earned their degrees has a significant impact on CCED readability. They indicate that directors who graduated from universities ranked in the top 100 for sustainability bring unique resources that not only enhance CCED readability but also promote a higher level of information disclosure around climate change and environment. The findings also demonstrate that the beneficial influence of directors’ educational degrees from high-sustainable universities only materialises from non-executive directors on the board. In addition, the results show the effectiveness of directors’ education in enhancing the effectiveness of sustainability committees towards improving CCED readability. The findings remain robust after considering endogeneity matters, alternative proxies and alternative model specifications.
In summary, the empirical findings provide new insights into the determinants of CCED and its readability within the context of developing countries in general and Saudi Arabia in particular. This thesis deepens our understanding of traditional and other governance mechanisms that are related or relevant to climate change disclosure. Moreover, this thesis extends the existing literature on the influence of board gender diversity on report readability, which has thus far been scarce and inconclusive, often treating female directors as a homogeneous group. Meanwhile, to the best of our knowledge, this thesis is the first to provide empirical evidence on a more informative categorization to differentiate between contexts in which female directors have relevant experience. Specifically, female directors with cross-directorships in countries with high environmental performance may encourage their Saudi companies to address climate change and enhance the clarity of their disclosure. This thesis is also, to the best of our knowledge, the first study to provide empirical evidence of the extended impact of university sustainability in the boardroom. Finally, this thesis provides valuable insights into CCED and its readability in developing countries.