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K-State Today

January 25, 2012

When it comes to greening a corporate reputation, study shows that words may speak louder than actions

Submitted by Communications and Marketing

Corporations are clamoring to be green, but their environmental reputation may depend more on what they say rather than what they do, according to a study by a Kansas State University researcher and other collaborators.

The study, co-authored by Amy Hageman, assistant professor of accounting, found that the more information companies disclose about their sustainable practices, the more they are viewed as being environmentally friendly -- even if their actual environmental performance is not strong.

The study will be published in the journal Accounting, Organizations and Society. Other co-authors include Charles Cho of the ESSEC Business School in France, and Ronald Guidry and Dennis Patten, both of Illinois State University.

The researchers investigated environmental performance and perceptions of environmental reputation. They analyzed the annual reports, corporate social responsibility reports and 10-K financial reports of companies listed in Newsweek magazine's 2009 green rankings of large U.S. companies.

Researchers found that companies with the worst environmental performance have the best environmental reputation. These included companies from environmentally sensitive industries like utilities, oil and gas.

"The data suggests that many companies that have the worst performance actually disclose more, likely because they have a greater incentive to promote sustainability practices like investing in green technology," Hageman said. "We also found that more extensive firm environmental disclosure is associated with more favorable environmental reputation scores, suggesting that higher levels of environmental disclosure appear to mediate the potential negative effects of poorer performance on environmental reputation."

Environmental disclosures are often left to companies and are not heavily regulated by a government regulatory body, she said.

"Although annual reports disclose the financials of a company, corporations can use it more as a marketing piece to spin their own stories, including positive messages about being green," she said.

Researchers also analyzed the North American Dow Jones Sustainability Index, which is purported to reflect companies' leadership in terms of corporate sustainability.

Investors interested in buying green companies often use the index as a shortcut instead of thoroughly researching companies, Hageman said. But not even the well-known index escapes the sway of corporations.

"Companies listed on the Dow Jones Sustainability Index have a much better environmental reputation," Hageman said, "but the corporations on the index are ones that are disclosing more information -- not the ones that are necessarily performing better environmentally."

More than 54 percent of Americans own stocks through individual stocks, mutual funds or retirement plans, according to Gallup.

"If people are relying on this index to invest in green companies, they're really being swayed a lot more by what companies say they're doing about the environment rather than their actual performance," Hageman said.

The index also may be hindering improved future corporate environmental performance, according to the study.

"Disclosure may actually reduce the incentives that companies have for improving their actual environmental performance in the future, because disclosure tends to reduce the potential negative effects of poor environmental performance," Hageman said.