Environmental Financial Reporting Adoption Lag: The Case of Uganda

Introduction

Environmental Financial Reporting (EFR) adoption and disclosure by entities are fronted as one of the approaches to address environmental sustainability management challenges (Mähönen, 2020). Unfortunately, limited empirical evidence is available on the adoption and disclosure of environmental related issues in the financial reports by entities (Senn, & Giordano-Spring, 2020). The purpose of this chapter is to contribute to the current debate on the need for financial environmental reporting and also to provide empirical evidence on the level of EFR disclosure of listed companies in Uganda.

Sustainable environmental financial reporting a daunting task and publishing financial reports without such information is failure by such an entity to render accountability for its existence (Tauringana, 2020). The common financial reporting premise is that any financial activity that does not affect an entity's financial position and performance is not measured. This implies that the entity's activities that affect the environment and are not linked to its financial position and performance are not measured. Thus, the financial information reported will be incomplete from a broad societal perspective that cherishes sustainable and responsible environmental reporting.

The world is witnessing increased negative effects due to environmental degradation that include, but are not limited to, deforestation, floods, wildfires, mudslides, diseases, famine, global warming, and the like (World Bank, 2020). Indeed, this year, British Colombia is experiencing unprecedented heat that is claiming people's lives, causing wildfires, and raising air quality concerns (Horgan, 2021). The accounting profession has been continuously challenged and implicated for not doing enough in the impending environmental crisis (Gray et al., 2000; Luft, 2005; Nguyen & Tran, 2019). This is based on the fact that the financial information provided by the accountants in the financial reports is devoid or very shallow on environmental sustainability (Mähönen, 2020). Most importantly, the information provided in the financial statements is the basis for many vital decisions which affect the ecosystem and flow of environmental financing.

Financial reporting is viewed as a process of identifying, recording, summarizing, and communicating the economic information of an entity to various stakeholders. Stakeholders use the information provided in the financial reports to make decisions that affect societal wellbeing and people's livelihoods (World Bank, 2020). This is especially true for countries like Uganda that depend on the natural environment for livelihood. Regardless of the level of national development, the need for entities to report environmental financial information is crucial (Pedron et al., 2021). As noted by Mähönen (2020), the current practice of voluntary environmental disclosure, leaves reporting of such vital information at the discretion of the entity.

Conventional financial reporting has limited itself to events that can be captured in monetary terms with profit being an important concern. Various environmental aspects may not necessarily be easily captured in monetary terms. Some may be treated as contingent liabilities while others would require disclosure (Zabihollah & Ling, 2017). Traditional accounting is premised on the neoclassical economic theory of profit maximization that considers various efficiencies to derive a report (Jensen & Meckling, 1976). The belief is that profit maximization will lead to allocative efficiency, which in turn influences social welfare (Luft, 2005).

This chapter analyzes the historical, theoretical, and contextual issues of environmental financial reporting. It also presents empirical results on the environmental financial reporting disclosure levels in Uganda and discusses the implication of the current disclosure levels. Finally, the need for a move from environmental accounting to sustainable environmental reporting is accentuated.

The information in this chapter communicates to policymakers about their role to legitimize environment-based financial reporting, as well as remind managers, accountants, and auditors to implement such reporting. Additionally, research endeavors will be stimulated, to further the debate on the relevance of environmental financial reporting. Finally, the information in the chapter supplements several interventions by different professions responding to the realization of Sustainable Development Goals (SDGs) on affordable and clean energy, Sustainable Consumption and Production Patterns, and climate action.