Does Environmental Performance Really Matter? A Lesson from the Debate of Environmental Disclosure and Firm Performance

Abstract

Prior empirical studies revealed that firms with high environmental performance tend to be profitable, but questions persist about the nature to the relationship. Those questions are referred to: "Does stronger environmental performance really lead to better financial performance?" Alternatively, "Is the observed relationship the outcome of some other underlying firm attributes?" The long debate about the relationship between environmental performance and firm performance in emerging economies still remain inconclusive and offer further explorations, especially in the context of emerging countries, which its rapid growth does not only carry social progress but also environmental challenges. Recent heuristic findings reveal that on average, while 42% of emergingmarket companies support environmental commitments in the form of policies or statements, they remain weaker on implementation and progress tracking. Little empirical research into the effect of environmental disclosure together with environmental performance on firm performance is done in Southeast Asian countries. This study extends the literature that has been done mostly in western societies by proposing a further linkage between environmental disclosure, environmental performance, and financial performance, which is rarely investigated in developing societies. The study analyzed 33 Indonesian manufacturing firms that were listed in Indonesian Stock Exchange (IDX) and reported their environmental performance assessment to the Ministry of Environment Indonesia. Statistic methods used for testing the hypothesis were T-test and multivariate regression model. The empirical results reveal that environmental performance has significantly influenced financial performance of the Indonesian manufacturing firm. However, one striking finding in this study is the insignificant influence of environmental disclosure on firm's financial performance. Meanwhile, environmental performance and disclosure simultaneously have significant effect on firm's financial performance. These results explicitly show how firms in emerging countries are going to be more concerned with environmental sustainability and long-run profitability.

Economic Development Matters: A Meta‐Regression Analysis on the Relation between Environmental Management and Financial Performance

“…Ferron and colleagues () suggest that enhanced efficiency by saving materials and preventing waste highly affects the cost structure in these countries. Arafat and colleagues (), who state that enhanced CEP affects learning in developing countries, confirm this result. Further, Agan and colleagues () propose that the higher CEP response to CFP in developing countries may also be explained by environmental supplier development.…”

“…), learning effects (Arafat et al. ), and environmental supplier development (Agan et al. ) as the most important factors in developing countries.…”

Effect of Environmental Cost on Performances of Quoted Firms in Sub-Saharan Africa, 2007-2016

“…(Appiah, Du, & Boamah, 2017) asserted that the subject of corporate performance has received significant attention from scholars in the various areas of business and strategic management. However, finding useful components of performance measures is a relevant area for research and a major difficulty is defining the appropriate components and showing whether the interpretations that result are reasonable and applicable elsewhere (Arafat, Warokka, & Dewi, 2012). (Wingard, 2001) studied financial performance of environmentally responsible South African listed companies.…”

“…The study discovered that there was negative relationship between environmental regulatory cost and product pricing decision. (Arafat, et. al., 2012) conducted a study on environmental costs and firm performances.…”

Does financial performance really improve the environmental accounting disclosure practices in India: an empirical evidence from nifty companies

“…The study found that environmental disclosure had significant relationship with ROE and it was also found that environmental disclosure relationship with ROE is insignificant. Arafat et al (2012) examined the relationship between environmental performance, environmental disclosure and firm performance by taking a sample of 33 companies in Indonesia. Environmental disclosure was measured by using PROPER program environmental ratings given by The Ministry of Environment Indonesia, and the financial performance was measured by using variable ROA.…”