Derivative Instruments on Emission Allowances: factors Influencing Disclosure in Portuguese Companies

Purpose: This article aims to analyze the degree of disclosure of information on Derivative instruments on Emission Allowances, analyzing the degree of compliance with the underlying accounting regulations, and their determinants factors. Theoretical framework: With the evolution of the European Union Emission Trading System (EU ETS), which foresees that the emission licenses will no longer be allocated free of charge and will be negotiated at auction, it is expected that there will be an increase in the trading of derivative instruments on licenses, to cover any risks of future price fluctuations, and therefore an increase in disclosure in this area. Design/methodology/approach: The methodology used in this study was the content analysis of the Reports and Accounts of the sample entities over a 12-year period, based on the creation of disclosure indexes for the topics under analysis. This is a longitudinal study that seeks to address possible changes in the behavior of companies' reporting practices in the periods 2008-2102 and 2013-2020 (corresponding to the 2nd and 3rd phases of the EU ETS). Findings: The results of the derivative disclosure index, in general, is higher (average IDGD is 0.81), although it is still very low when it specifically refers to derivative instruments for risk hedging related to emission licenses (IDL_LE = 0.11). Contrary to expectations, not only companies do not use this type of instrument to cover the risk of fluctuations in the price of licenses, nor is the change in the behavior of companies between the 2nd and 3rd EU ETS periods significant. Regarding the explanatory factors studied, there is only a statistically positive correlation between the disclosure index and profitability. Research, Practical & Social implications: The study will focus on a sample of companies operating in Portugal, which are part of the National Emission Licensing Plan (PNALE) I and II. The literature is silent on previous studies related to disclosure on emission allowances derivatives, so our study represents a contribution to the advancement of literature in this area. Originality/value: As far as we know, previous studies related to the disclosure of derivative instruments for gas emission licenses are non-existent, so our study represents a contribution to the advancement of the literature in this area.