Corporate Environmental Expense in the Perspective of Japanese Investors: Merely Another Type of Expense?

By Lasmin; Nuzula, Nila Firdausi | Journal of International Business Research, September 1, 2012 | Go to article overview

Corporate Environmental Expense in the Perspective of Japanese Investors: Merely Another Type of Expense?


Lasmin, Nuzula, Nila Firdausi, Journal of International Business Research


ABSTRACT

Much has been written about the relationship between corporate social performance and corporate financial performance. Some researchers argue that this relationship is consistent and mutual, while others are more sceptical. Some maintain that it is one directional, while some contend that it is bi-directional. Whatever the arguments are, they do not reach to the extent where investors, as the most rational business participants, are included into previous studies. Thus, the aim of this paper is to answer whether investors are concern with firms engaging in environmental issues, especially to empirically examine the relationship between firms' environmental expenses and their capital market performance. Drawing on Schaltegger & Figges's (2000) shareholder value concept, applying robust statistical regression techniques of Ordinary Least Square and Panel Data estimations, and using archival data from 34 prominent Japanese firms within 8 years of observation, we find relatively sufficient evidence that Japanese investors are not impressed by firms with higher environmental expenses.

INTRODUCTION

Since early 1990s scientists have admitted that humankind has been facing severe environmental crises due to the continuing occurrences of global warming, acid rain, ozone depletion, biodiversity loss, topsoil erosion, tropical deforestation, and groundwater depletion. Business societies, especially corporations seem to contribute to those crises because in the process of producing goods and services, they have been consuming most of natural resource reserves. Environmentalists argue that the resources that enter the economic process will eventually emerge as waste, at the exact level of resources intake (Welford and Starkey, 1996). Fortunately, it appears that business societies are better aware of the importance of environmental aspects in their production and management systems and realize that they have to take a proper measure on business-environment relationships. Historically business practices were designed based on one important assumption: unlimited environmental resources. However, in most part of the world, it appears that this view has changed along with the decline of natural resource reserves. In Japan, new era of environmental-friendly-business operation has been started by the government, and consequently, business institutions have to adapt to this change.

OECD (2010) outlined that Japan's experience in dealing with environment issue is valuable input for reviewing environment performance. The report showed that Japanese government has made substantial progress within this issue, allowing the country to become a leader in environmental innovations such as the 3Rs (reduce, reuse and recycle) approach for waste and eco -innovation and green technologies. While the government provides the basic environmental infrastructure and institutions, it should be noted that Japanese business communities that actively participate in the implementation of the environmental policies should receive the major acknowledgement. Graph 1 below describes changing proportions of pollutant abatement expenditure of business sector and both of local and central government.

The trends reveal the increasing role of the private sector in financing and managing environmental expenditures. It seems that the Basic Environment Law, which was enacted in late 1993, has been emphasizing on the advanced participation of Japanese companies. The law set forth the responsibility of the central and local government, corporation and the general public to preserve the environment. Particularly, corporations are pursued to responsible for taking necessary measures to prevent environmental pollutions resulted from their activities and to properly conserve the natural environment in conducting business activities (Stanwick and Stanwick, 2006). This resulted in a 22% increase in pollution abatement expenditure funded by Japan's private corporations since 2000 (OECD, 2010). …

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