Abstract
The purpose of this paper is to determine the overall qualityof environmental disclosure provided by the airline sector and assesfactorsthat could be of influence to the quality of that reporting. Previous literature strongly recommends an evaluation and comparison of CSR initiatives in the environmental dimension among airlines (Gebel 2004, Hooper & Greenall 2005, Lynes & Dredge 2006). The study reported herein uses content analysis to establish observations on Corporate Social Responsibility (CSR) information provided by the lead-edge airlines. A cross-continental analysis will be performed to identify differences among continents. Using data from sustainability reports, the environmental commitment of airlines from all over the world is examined and examples reports are given. Specific environmentally related CSR initiatives implemented in the airline industry are identified and their level of adoption is examined.This study is designed to allow for an evaluation and comparison of the state of environmentally related CSR and the reporting thereof among different airlines and continents. The empirical analysis suggests that the airline companies recognize the increasing importance ofsustainability in their communication with the stakeholders. Great differences were found in the reporting ofthe companies’ commitment to sustainability. Possible reasons for this include the voluntary nature of reporting, variation in legislation, the differences inrequired information by stakeholders and the degree of performance of sustainability.A factors found relevant in determining the quality of reporting is the use of the framework proposed by the Global Reporting Initiative.
Keywords: Corporate social responsibility, environmental disclosure, aviation, Global Reporting Initiative, third-party assurance, CSR disclosure requirements, integrated reporting.
Table of Contents
Chapter 1: Research Intention
1.1 Introduction
1.2 Aviation and the Environment
1.3 Outline of the thesis
1.4 Aim of the thesis
Chapter 2: Theoretical Elaboration
2.1 Defining Corporate Social Responsibility
2.1.1 Economic sustainability
2.1.2 Social responsibility
2.1.3 Environmental protection
2.2 Motivations for CSR
2.3 Communicating CSR
2.3.1 Media for reporting CSR
2.3.2 A sustainability reporting framework
2.3.3 Global CSR Disclosure Requirements
2.3.4 External Verification
2.4 CSR reporting and the airline industry
2.5 Environmental initiatives in the airline industry
Chapter 3: Research Methodology
3.1 Hypotheses
3.2 Sample
3.3 Methodology
Chapter 4: Results
4.1 Reflection on sample
4.2 Descriptive statistics
Chapter 5: Conclusion
5.1 Conclusions
5.2 Limitations
5.3 Suggestions for further research
References
Appendix 1: Sample
Appendix 2: The Scorecard
Appendix 3: Scores per airline
Chapter 1: Research Intention
1.1 Introduction
During the last two decades, concerns about the sustainability and social responsibility of businesses have become a high profile issue in many countries and industries (Campbell 2007). Increased pressure from consumers and investors, sharpened legislation, environmental education and the uptake of eco-labelshave led to growing demand for transparency about corporate behavior on a range of issues (Kolk 2008). Especially intergovernmental bodies, Non-Government Organizations (NGO’s) and the general public encourage firms to behave socially responsible (Moreno and Capriotti 2009). This caused the paradigm to shift away from valuing profit maximization as the most important objective of business,towards incorporatingCorporate Social Responsibility (CSR) practices into all operations. As a result, CSR hasbecome a subject of much interest within the academic world (KPMG 2005).
Companies generally present information on their sustainability effort and performance via their website, news releases or CSR disclosures (Campbell and Sayer 2004). CSR disclosure (sometimes also labeled ‘triple bottom line accounting’ or ‘People, Planet, Profit’) can be defined as the information a company discloses about its environmental impact and the relationship with its stakeholders, by means of relevant communication channels. The growing CSR awareness is reflected in the increasing number of CSR disclosures (Kolk 2005).
Lyon and Maxwell (2006, 2007) find that firms with poor reputations disclose extensively, while firms with excellent reputation disclose nothing, as they gain little by disclosing successes since they are already expected to succeed. Accordingly, the focus of much of the empirical research on environmental motivations lies with the ‘heavy’ industries sectors such as the chemical,and transport sectors. Pressures from different stakeholder groups are reflected in CSR disclosure: firms in consumer sectors may be closely monitored by consumer groups. Hence, they will report more on social issues. Firms in polluting industries tend to have relatively high levels of environmental disclosure, following that they are often being monitored by environmental groups. Accordingly, polluting firms proactively disclose much information on their environmental performance to reduce the possible political costs arising from their despised activities (Deegan and Gordon 1996,Meek et al. 1995).
1.2 Aviation and the Environment
The focus within this thesis lies upon the airline industry. The continuous growth of the aviation industry, the global importance of the industry’s operations and its environmental impact[1] makes it a good sector to study in terms of environmental disclosure. Plus,the airline industry holds an interesting juxtaposition: although the industry is part of the service sector, it possesses various characteristics that are similar to the aforementioned ‘heavy’ industries: intense regulation, high capital costs and a tendency towards oligopolies.
The public has criticized community noise exposure and the degraded air quality around airports since the industry’s beginnings. More recently, however, attention shifted toward limiting the effect of aviation on the global climate (Dallara 2011).The industry is greatly contributing to the greenhouse effect and is considered one of the causes of global warming. In particular, the atmospheric carbon dioxide levels are ever-increasing. Carbon dioxide is one of several greenhouse gasses (GHGs), and causes harm to the environment. A small but growing portion of global climate change is attributed to the aviation industry. Aviation induces climate change results not only by emitting carbon dioxide, but also from emissions of nitrogen oxides and water vapor. From calculations by the European Commission, it appears that the airline industry is currently the fastest growing polluter in terms of greenhouse gasses. Trends of global emissions of greenhouse gases from air traffic show a substantial autonomous growth.
Recognizing the sector’s contribution to environmental impact, and given the projected growth, it is not surprising that aviation industries are at the forefront of the debate concerning sustainability. Interest in the scope and effectiveness of airlines’ effort to control and lessen the negative environmental and social impact of their business is growing globally (Kolk, 2008). Subsequently,the airline industry is increasingly being encouraged to contribute to sustainable development and document performance through the disclosure of social and environmental information.The aviation alliances OneWorld, Skyteam and Star Alliance all drafted a Corporate Social Responsibility Statement, setting out the commitments of all alliance-members. Despite the increasing pressure, the airline industry was relatively slow at adopting sustainability reporting. Research by Cowper-Smith and Grosbois (2011) showed that only 14 out of 41 researched airlines produced corporate sustainability reports as of January 2009. However, a more recent analysis by PricewaterhouseCoopers (2011) found that 30 out of a sample of 46 airlines produced sustainability reports as of August 2011. In this sample, 61 out of 73 reported on environmental issues as of September 2012. Airlines are clearly taking notice and working to improve their corporate sustainability reporting.
The overall airline industry has ambitious goals to reduce emissions. The International Air Transport Association (IATA)[2] documented the plans in a report: ‘A global approach to reducing aviation emissions – First stop: carbon neutral growth from 2020.’ Efforts include commitments to put a maximum level on aviation CO2 emissions by the year 2020 through improving fuel efficiency with an average of 1.5% annually, starting as of 2009.
Recently, the EU has extended the European Union Emissions Trading Scheme (EU ETS) to the airline industry. The EU ETS, launched in 2005, is aimed at combating climate change and was the first large emissions trading scheme in the world. After the energy industry, air transport is now the largest sector included in the EU-ETS. As of January 1st 2012, airlines receive tradable allowances covering a certain level of CO2 emissions from their flights per year. The EU charges airlines flying in and out of Europe for their carbon dioxide emissions. Any airline that does not comply faces a fine, and the EU has the right to ban persistent offender airlines from its airports. Although the carbon-tax schemecame into force January 2012, fees do not have to be paid until March 2013. Nonetheless, these rules have drawn protest from airlines around the world. At the end of 2011, the council of the International Civil Aviation Organization (ICAO) demanded, without result, that the EU respect the principles applied in civil aviation and refrain from applying EU law outside of its territory and to non-European airlines respectively[3]. Another attempt to overturn the scheme, by the US, was also rejected by the European Court of Justice stating that “the extension of the EU ETS to aviation does not infringe the principle of territoriality of third countries.[4]” Intense resistance against the European solo effort has developed in the meantime. Led by the US and China, 26 nations are now protesting the EU's airline carbon tax. The Chinese aviation authority has banned itscountries’ airlines from paying the new European Union carbon charge. The Civil Aviation Administration of China (CAAC) stated that airlines were not allowed to pay the EU charge, increase freight costs or add other fees[5].
In large part due to growing public concern about CSR and global warming, corporate sustainability principles are becoming increasingly important. There is a need for airlines to disclose information on their environmental performance. This thesis tests to see if the increased importance of sustainability principles results ina higher quantity and higher quality of reporting of sustainability performance. It is expect that the quantity is reflected by the increasing amount of airlines actively reporting on their environmental actions and results. The quality is represented by an increase in the solidity and comparability of environmental disclosures.
Despite being a ‘hot topic’, there is currently little research on CSR practices and the reporting thereof in the airline industry, and the current state of CSR in the industry is therefore largely unknown.The literature strongly recommends an evaluation and comparison of CSR initiatives in the environmental dimension among airlines (Gebel 2004, Hooper & Greenall 2005, Lynes & Dredge 2006). The pivotal role of airlines in the environmental debate provides justification for evaluating thequality of their environmental reports.
1.3 Outline of the thesis
This chapter elaborates on the concept of sustainability. The first part introduced CSR and the second part focused on the environmental impact of aviation and the role CSR plays.Moreover, the disposition and aim of the paper are discussed explicitly in this part.
As the discussion on CSR requires theoretical elaboration on the rationale of it, chapter 2 is dedicated to previous literature. Literature on CSR, environmental disclosures and the environmental impact of aviation is discussed. Also elaborated on are the format of reports, the use of GRI guidelines, the possible influence of (local) regulation and alliance-membership. To conclude, auditor involvement in assessing the reliability of sustainability reporting is addressed.
The third chapter describes thechosen objects of analysis and the methodology.An analysis of 73airline companies is presented to show the nature and content of environmental disclosure in general, and to compare and contrast companies’ progress in reporting on the sustainability of their operations. Moreover, there is a review on the different mediathat was used by the airline companies to communicate information on CSR.
The results in chapter 4 will present an indication of the current world-wide situation – the status quo – with regard to aviation and CSR disclosure. The evidence gathered from airlines’ sustainability reports will used to elaborate on the transparency efforts. Moreover, potential influences on quality by GRI, auditor involvement, legislation and alliance-membership are discussed.
The final section of this research paper draws conclusions about the current state of sustainability reporting in the airline industry, and will reflect upon possibilities and limitations within this field of research.
1.4 Aim of the thesis
This paper is aimed at answering the following research question: what is the overall quality of environmentally-related disclosures in the airline industry, and how do different continents compare?The objective of the research is to qualitatively evaluate the level of environmental CSR disclosure within the airline industry across the continents. This is done by assessing the environmental reporting quality – defined as the extent to which the reports of the sampled airlines reflect the principles of the GRI standards and the environmental initiatives proposed by IATA to reduce air transport's carbon footprint. Within this study, a framework is created in order to allow for measurement and comparison.Another objective is to consider the impact, if any, of the use of GRI, third-party verification, legislation and alliance-membership on the quality of environmental reports.
The airline sector has one of the largest groups of stakeholders of any sector, and airlines need to be responsive to all of them (PwC 2011). Finding answers to the question will help all stakeholders – including communities, governments and standard setters – gain an insight into how airlines are committed to our environment, and how solid reporting helps companies to efficiently manage the world’s resources.
Chapter 2: Theoretical Elaboration
A discussion on Corporate Social Responsibility (CSR) requires an extensive theoretical elaboration. This chapter covers the theory to provide the airline industry with a basis to engage in environmentally responsible actions and provides an overview of techniques made available to the industry to fulfill this responsibility.
2.1 Defining Corporate Social Responsibility
Many scholars have proposed definitions for CSR(Rahman 2011). Yet, there is no universal definition for CSR, making the development of theory difficult. Approaches include “the obligation toward society assumed by business” (Bateman and Snell 2004). Or “a manager’s duty or obligation to make decisions that nurture, protect, enhance and promote the welfare and well-being of stakeholders and society as a whole” (Jones et al 2000).
The stakeholder model has become central to the CSR paradigm (Jones, 1995). Corporate social responsibility focuses on corporate governance as a vehicle for incorporating social and environmental responsibilities into the business decision-making process, benefiting not only financial investors, but also employees, consumers, and communities (Gill, 2008).Generally, corporate action on CSR concerns activities that go beyondlegal obligations and beyond the objective of profitability. We classify three types of sustainability, being social responsibility, environmental protection or economic sustainability.
2.1.1 Economic sustainability
Readers of sustainability reports often desire to know how the company contributes to the sustainability of the economicsystems in which they operate. Anorganization may be financially viable, but this mayhave been achieved by creating significant externalitiesthat impact other stakeholders. Economic PerformanceIndicators are intended to measure the economicoutcomes of an organization’s activities and the effect ofthese outcomes on a broad range of stakeholders[6].
2.1.2 Social responsibility
Social responsibility represents recognizing the needs of everyone, not just the shareholders. In this category, social impacts associated with the various stakeholder-groups are addressed.It involves all the company’s interaction and communication with stakeholders, including customers, the employees, the local community and the society at large on issues like human rights, employee welfare and product responsibility.
2.1.3 Environmental protection
This thesis is focused on the environmental pillar, which is aimed at achieving a higher environmental performance. It concerns the effective protection of the environment and an efficient use of natural resources. Environmentalindicators reflect inputs (materials, energy, water), outputs (waste, effluents, emissions) and the mode of impact an organization has on its environment[7]. Organizational energy use can be split into direct and indirect energy. Direct energy is energy that was consumed by the company’s operations, indirect energy is the energy used by those who serve the company. Measuring energy use is relevant because the burning of fossil fuels, to generate energy, causes the emission of greenhouse gasses. Emission indicators measure standard releases of polluting gasses into the atmosphere.
2.2 Motivations for CSR
There are numerous theories to explain the incorporation of CSR into the management equation. Reasons for environmental reporting were rarely explicitly explained in the reports studied.In this paragraph, theories most relevant for understanding the incentive to manage and report on environmental performance are discussed.
R. Edward Freeman (1984)was the first tointroduce stakeholder theory, identifying stakeholders of a firm and describing the importance of giving due regard to the interests of this group. Freeman defined a stakeholder as “any group or individual who can affect or is affected by the achievement of the organization’s objectives”. In his book, titled Strategic Management: A Stakeholder Approach, he states that a ‘stakeholder approach emphasizesactive management of the business environment, relationships and the promotion of shared interests to ensure the long-term success of the firm’.A modern organization has been entrusted with an extensive amount of economic and human resources, and therefore has the power to affect many more people than the participants in the firm’s operations or transactions. Firms are to incorporate the needs and values of all stakeholders within their strategic and day-to-day decision-making process.CSR has also been defined “a complex web of interaction between an organization and its stakeholders” (Sjöberg, 2003, p192). Groups and individuals that are considered stakeholders by Friedman (2006) include employees, NGO’s, local communities and future generations. The relationship between a company and its stakeholders entails information asymmetry. Pressure arises for firms to communicate information relevant to the different stakeholders. The way organizations interact and communicate with their stakeholders is a key feature in the concept of CSR and environmental reporting. Stakeholder theory therefore provides an accepted explanation to the voluntary corporate disclosures phenomenon. In short, the stakeholder theory identifies the dynamic and complex relationship between firms and their environment; providing a justification for incorporating strategicdecision making into the field of corporate social responsibility(Adenibi 2005).