Guest editorial: Toward a better understanding of sustainability accounting in the energy industry

Citation

Hassanein, A., Nimer, K.A. and Hussainey, K. (2024), "Guest editorial: Toward a better understanding of sustainability accounting in the energy industry", Journal of Financial Reporting and Accounting, Vol. 22 No. 1, pp. 1-6. https://doi.org/10.1108/JFRA-03-2024-643

Background

Sustainability accounting research is scarce in the energy industries (e.g. oil and gas, electricity, renewable energy and consumable fuels). The International Energy Agency reveals that the energy industry is known for its substantial environmental impacts, with energy-related carbon dioxide (CO₂) emissions accounting for most global greenhouse gas emissions. Oil and gas are the primary fuel combustion sources, contributing to approximately 53% of global energy-related CO₂ emissions. Sustainability has long been a critical concern for firms operating in the energy industries. These companies now strive to achieve cost-efficient and environmentally friendly operations. Likewise, other incentives to prioritize sustainability include compliance with an expanding array of environmental regulations, pressure from shareholders and employees and a desire to contribute to the well-being of the planet’s future. Therefore, much more about sustainability accounting and accountability practices and challenges in energy industries need to be explored.

Energy firms have a unique opportunity to contribute to the United Nations’ Sustainable Development Goals. They can do this by enhancing their positive contributions or avoiding and mitigating their negative environmental impacts (Benameur et al., 2023). Energy production plays a crucial role in promoting economic and social development. It provides affordable and reliable energy access (GOAL 7: ensure access to affordable, reliable, sustainable and modern energy for all). Furthermore, it creates opportunities for decent employment, business and skills development, increased fiscal revenues and improved infrastructure (GOAL 9: industry, innovation and infrastructure). Therefore, there is a need to explore sustainability accounting and accountability practices and challenges faced by energy industries, which is attempted to be addressed in this special issue.

Articles review

This special issue covers several topics addressing different issues of sustainability accounting in the energy industry. The first article is titled “Board characteristics and ESG disclosure in energy industry: Evidence from emerging economies” by Nuhu and Alam (2023). It focuses on investigating the impact of board characteristics on environmental, social and governance (ESG) disclosure in the energy industry of emerging economies. The authors use the Bloomberg ESG rating to measure the extent of ESG disclosure of a sample of 1,260 observations from the emerging economies of Brazil, Russia, India, China and South Africa (BRICS). The findings indicate that the BRICS firms have a relatively low level of ESG disclosure (37%), with significant variability among them. Likewise, there is a positive relationship between board gender diversity, board composition and board diligence with the level of ESG disclosure. However, no significant relationship is observed between board size and ESG disclosure. The practical implications emphasize the importance of corporate board attributes in influencing strategic decision-making. These findings hold value for regulators, policymakers and investors seeking to make informed investment choices. This study contributes to the existing literature by providing new evidence on the relationship between board characteristics and ESG disclosure in the energy industry of emerging BRICS countries. It represents one of the attempts to explore this relationship, offering insights within a panel multi-country research framework. It enhances our understanding of the role of board characteristics in promoting sustainable practices and transparency in the energy sectors of emerging economies.

Another article is conducted by Azzam et al. (2023) and is titled “How big data features drive financial accounting and firm sustainability in the energy industry.” It investigates the relationship between perceptions of big data (BD) features and financial accounting outcomes. It also explores the moderating role of financial accounting practices on the relationship between BD features and firm sustainability. The research design involves a questionnaire survey with participants from two distinct groups: academic scholars and industry practitioners operating in the energy sector. The study reveals significant positive associations between BD features and financial accounting practices, including reporting quality, earnings determinants, fair value measurements, risk management, firm value, decision-making efficiency, narrative disclosure and firm sustainability. Path analysis indicates that financial accounting practices indirectly mediate the impact of BD on firm sustainability. The results suggest that energy firms should consider incorporating BD analysis into their financial accounting practices to enhance sustainability performance and create long-term value for stakeholders. The practical implications are particularly relevant to accounting and business academics, emphasizing adapting the accounting curriculum to align with the technological revolution, specifically in BD analytics. Practitioners in the energy industry should also focus on refining their skills and knowledge to effectively address the challenges posed by BD in the foreseeable future. This study contributes valuable insights by critically examining the impact of BD on various financial accounting practices, which have been overlooked in previous research. It highlights the transformative power of BD in financial accounting and provides valuable insights into its potential implications for energy firms.

Likewise, a paper titled “Internal control, debt risk, CEO education, and earnings management: Evidence from China” was authored by Chi and Gooda (2023). It examines the influence of corporate financial debt risk (FDR), internal control (IC) effectiveness and CEO education on earnings management (EM) techniques. It uses a sample of listed firms in China from 2010 to 2017, representing various industries such as agriculture, forestry, livestock farming and fishing, mining, manufacturing, electric power, gas and water production and supply, construction, transport and storage, information technology, real estate, social services and communication and cultural sectors. The findings reveal that firms with more robust ICs and lower FDR are less likely to engage in EM practices. Conversely, companies with weaker ICs are more prone to manipulate earnings. Besides, CEO education moderates the relationship between IC, FDR and real EM. These results apply to the sectors covered in the study, acknowledging the significance of the energy industry within the overall economy. The practical implications are twofold. First, it guides listed companies in China, aiding their decision-making processes and enhancing investors’ understanding of business performance. Second, it assists management in avoiding debt risk and the subsequent consequences of earnings manipulation. The study contributes to the existing literature by highlighting the importance of IC and debt risk in enhancing information quality in China. Furthermore, it introduces CEO education as a moderating factor in this relationship.

Moreover, a paper titled “Can CSR constrain accruals and real earnings management during the COVID-19 pandemic? An international analysis” is authored by El-Feel et al. (2023). This paper provides insights into the complex relationship between EM and corporate social responsibility (CSR) in the context of the financial downturn caused by the COVID-19 pandemic. It uses parametric t-tests, non-parametric Wilcoxon rank-sum tests and ordinary least squares regression analysis with the Newey-West procedure. The sample consists of 1,984 firms from 47 countries, covering the period from 2014 to 2020. EM is assessed using two proxies: discretionary accruals based on the modified Jones model (1995) and real EM (REM) based on the Roychowdhury model (2006). CSR is based on the Thomson Reuters database’s ESG scores. The findings indicate that firms engage in EM practices during the pandemic. However, socially responsible firms demonstrate greater honesty and transparency in their financial reporting processes. The study also reveals that socially responsible firms are less likely to engage in REM practices during the pandemic. It provides implications for lenders, investors, policymakers and managers. It enhances their understanding of EM practices during a negative shock and emphasizes the ethical significance of CSR. The findings contribute to the existing literature by expanding our knowledge of the role of CSR in promoting financial reporting quality and by providing insights into the impact of COVID-19 on accrual and REM practices.

Besides, Khiari et al. (2023) authored an article titled “Does the sun ‘shine’ on utility firms? Evidence from pollution control bonds and overinvestment relationship”. This study investigates the relationship between pollution control bonds (PCBs) and overinvestment in utility firms. The empirical analysis uses a data set of 215 US energy firms from 2011 to 2021. The findings indicate an adverse relationship between PCBs and overinvestment, suggesting that PCBs effectively curb excessive investment within utility firms. Furthermore, the study reveals that the impact of PCBs on overinvestment is weakened by CEO overconfidence. These results hold when using different metrics to measure overinvestment and CEO overconfidence and when alternative estimation methods are used. The findings align with insights derived from agency theory and upper-echelon theories. It is recommended that regulators actively promote using PCBs as a financing tool for environmentally focused initiatives. This would require an increased regulatory presence within the utility sector, especially in regions with higher pollution levels. Strategic policies and regulatory frameworks should be implemented to mitigate excessive investments. At the same time, policymakers should introduce financial instruments designed to optimize investment efficiency and facilitate eco-friendly projects. The originality and value of this paper lie in examining the impact of a specific type of green bond, namely, PCBs, on overinvestment. It also contributes to the literature on personality traits, specifically within the context of the upper-echelon theory, by investigating the moderating influence of CEO overconfidence.

Moreover, Yamen and Mersni (2023) authored an article titled “Carbon emissions reduction and tax evasion behaviour: A trade-off between environmental goals and economic feasibility.” This study explores the relationship between carbon emissions reduction and tax evasion behavior, specifically carbon dioxide (CO₂) emissions. The empirical analysis uses data from 200 countries from 2000 to 2017. The findings reveal a significant association between carbon emissions reduction and tax evasion behavior. Specifically, as carbon emissions decrease, tax evasion behavior increases. This suggests that companies resort to tax evasion to offset the substantial costs of reducing CO₂ emissions. The practical implications highlight that efforts to minimize CO₂ emissions come with significant costs, potentially leading to an increase in tax evasion and contributing to countries’ budget deficits. Policymakers and stakeholders can benefit from these results by implementing effective environmental and fiscal regulations that promote a sustainable and eco-friendly future. These regulations can help strike a balance between economic growth and environmental protection. The originality and value of this paper lie in its examination of the impact of carbon emissions on tax evasion behavior using macro-level data. By shedding light on this trade-off, the research provides valuable insights for understanding the complexities between environmental goals and economic feasibility.

Furthermore, an article titled “Accounting practices and regulations for extractive industries: A framework for harmonization” was authored by Abdo et al. (2023). This study develops a framework for harmonizing the diverse accounting practices used by extractive industries. The research adopts a three-stage approach. First, a comprehensive literature review is conducted to trace the historical evolution of accounting regulations in extractive industries. Second, an accounting practice index is constructed to empirically demonstrate the wide range of accounting practices used within these industries. Finally, a harmonization framework is proposed based on the findings from the literature review and the accounting practice index. The accounting practice index provides empirical evidence of the significant diversity in accounting practices across extractive industries. The literature review analyzes the past efforts made by accounting and regulatory bodies to standardize these practices, highlighting the challenges and reasons for the lack of successful standardization. The authors extract valuable lessons from these previous attempts and present a harmonization framework as a potential solution. The proposed harmonization framework aims to align the diverse accounting practices used by extractive industries, promoting comparability and consistency in the financial figures and statements. Achieving harmonization is crucial for enabling informed investment decision-making. The originality and value of this study lie in developing a pioneering harmonization framework. This framework not only enhances the comparability of financial accounts within extractive industries but also has the potential to be applied to other industries to harmonize their diverse accounting practices. By addressing the challenges associated with accounting practices and regulations in extractive industries, this research contributes to the literature and offers practical insights for improving accounting standards and comparability in these sectors.

Finally, a research paper titled “‘Go Green’ – evaluating the roles of environmental concerns, environmental social norms and green technology in fostering pro-green banking behaviors” is authored by Ashraf (2023). It investigates how bankers’ perspectives on environmental concerns, the environmental normative structure and green technology influence their intentions toward green banking activities (called G-banking). The study’s theoretical foundation is based on the theory of bounded rational planned behavior. A survey instrument was developed to measure various aspects, including environmental concern, environmental normative structure, green technology, attitudes, perceived behavioral control and subjective norms. The survey was administered to bankers from selected commercial banks in Bangladesh using a random sampling procedure. The data were analyzed using the partial least squares structural equation modeling technique. The findings indicate that all the examined predictors strongly predict the G-banking intentions of the sampled bankers in Bangladesh. The results also reveal that attitudes, subjective norms and perceived behavioral control significantly mediate bankers’ rational G-banking intentions. The practical implications highlight the importance of environmental concerns, social normative structure and green technology in influencing bankers’ attitudes and intentions toward G-banking activities. The findings suggest that bankers respond positively and intend to engage in G-banking activities based on their environmental concerns. From a societal perspective, the study emphasizes the potential of G-banking practices in reducing carbon emissions and other pollutants, thus contributing to overall environmental sustainability and ecological conditions. This research adds value to the limited existing studies on the perspective of G-banking in Bangladesh. It provides empirical insights that can benefit clients, institutions and policymakers in the banking sector, facilitating the development of pro-environmental initiatives in the industry.

Conclusion

This special issue has made significant strides toward advancing our understanding of sustainability accounting in the energy industry. The energy industry’s critical role in global emissions and the increasing importance of sustainability goals for firms operating within it underscored the necessity of delving into sustainability accounting practices and challenges. The review of articles showcased the diverse research contributions, each shedding light on distinct facets of sustainability accounting in the energy sector. These studies significantly enrich the literature by addressing critical gaps in sustainability accounting research within the energy sector. The insights from these diverse contributions offer valuable guidance for regulators, policymakers, investors and industry practitioners, steering the energy sector toward a more sustainable and transparent future.