Faculty Research: Eun-Hee Kim, Ph.D.
Uncategorized | Sep 11, 2020 | Gabelli School of Business
By Chelsee Pengal
Think about the last time you had to share bad news with a friend or family member. Did you come right out and say it or did you dance around the issue?
It’s human nature to want to decrease negativity in a conversation, but Eun-Hee Kim, Ph.D., assistant professor of strategy and statistics at the Gabelli School, says something similar happens when it comes to businesses reporting bad environmental news.
In recent years, she has investigated the ways firms deal with environmental reporting and found that they tend to understate environmental achievements when they don’t perform well financially. Referred to as “brownwashing” in her research, this practice aims “to avoid potential accusations from shareholders that they are diverting valuable resources from more profitable opportunities,” Kim explained. Other firms may choose to leave out details that paint them in a negative light and tout the positives. Kim said this “greenwashing” phenomenon has been studied more frequently.
However, companies are now facing increasing pressure to disclose more details about their environmental impact. Kim and co-author Kira R. Fabrizio, Ph.D., associate professor at Boston University, explored how firms are dealing with this in a recent paper in Organization Science. They studied approximately 1,000 submissions to the Carbon Disclosure Project (CDP) from firms in more than 50 countries to determine whether companies with less favorable performance had found a way to disclose what was expected without damaging their rating.
The research showed that the more firms were obligated to disclose about unfavorable environmental practices, the more complicated language they used, such as longer sentences, complex words, technical terms, and jargon. She learned, too, that the more firms had to hide—the more negative information they were being asked to reveal—the more they used intentionally confusing language.
The strategy worked. The decrease in performance ratings as a result of negative reporting was smaller for firms that used more ambiguous language, the researchers found. The CDP is understandably hesitant to penalize a firm for something it isn’t quite sure the company is doing or can’t clearly interpret.
This phenomenon is not strictly limited to environmental disclosures. “One application is more social-related,” said Kim. For instance, companies may make charitable donations, work for local communities, and engage in many social causes, but at the same time, they may limit employee benefits. If complicated language is used to gloss over that negative information, the public will see the positive community effects without understanding the full picture.
Is there a solution? Organizations such as the United Nations have attempted to come up with a standardized way of disclosing, but it’s still voluntary at this point, Kim said. The U.S. Securities and Exchange Commission has announced that it will look into environmental disclosures to promote transparency. The agency already requires “everyday language” to be used for financial disclosures, however, Kim cautioned, “whether companies will follow ensuing guidelines is another question.”
While the recommendations continue to evolve, for organizations with nothing to hide, making a positive report is as simple as sharing good news with a friend.