Environmental Costs, Social Responsibility and Corporate Financial Performance - a Closer Examination of Japanese Companies

By Chiang, Bea; Pelham, Alfred et al. | American Journal of Business Research, November 2015 | Go to article overview

Environmental Costs, Social Responsibility and Corporate Financial Performance - a Closer Examination of Japanese Companies


Chiang, Bea, Pelham, Alfred, Katsuo, Yuko, American Journal of Business Research


Introduction

The concept of environmental accounting was created in 1970 when the United States implemented the Environmental Protection Agency (EPA) in response to growing concerns over the conservation of the environment (Nixon, 1970). In 1972, the United Nations implemented the United Nations Environment Program (UNEP) to address the similar environment concerns. These efforts have been able to create progress in environmental safety, although at a slow pace.

According to the American Institute of Certified Public Accountants (AICPA), environmental accounting is "the identification, measurement, and allocation of environmental costs, the integration of these environmental costs into business decisions, and the subsequent communication of the information to a company's stakeholders," (Stanko et. al., 2006 p21). There are several environmental accounting methods that are used to account for environmental impact. Major methods include Emissions Accounting which identifies pollutant emissions by economic sectors and a structured matrix to monitor the impact. Countries such as Sweden, Netherlands, Japan, and Germany have implemented this type of reporting within their respective environmental accounting frameworks (Fornaro et. al., 2009). Conventional National Account is another method, which measures the flow of goods and services resulting from production as well as capital stock given under an assumption that company's production and service affect the environment. Conventional national accounts focus on tracking the effects within the production phase. The natural environment would be conceptualized as a stock of the natural capital and the usage of the environment would flow from the stock (Hecht, 1999). Some countries use Green GDP to measure environmental effect. This method tracks the environmental decline impacted by a company's goods and services, as well as measuring the impact of economic growth on the environment. The loss of biodiversity and the causes of climate change are monetized (Boyd, 2007). The Chinese government announced in 2004 that it would replace the Chinese GDP index with green GDP. Similarly, India implemented a green GDP method of environmental accounting in 2009 (Xiaohua, 2007, Bureau, 2009).

Environmental Accounting in Japan

Japan, as one of the leading countries in environmental conservation efforts, has made much progress in recent decades. Japan plans to reduce its emissions by 15% by the year 2020 compared to 1990's levels. On the other hand, the U.S. only plans to reduce its emissions by 4% by the year 2020 (Johnson, 2009). Additionally, unlike its European and American counterparts, Japan does not participate in purchasing emissions trading, which allows companies to buy and sell emissions credits amongst themselves. There is no limit as to how many credits companies can trade. Companies can keep buying credits from other companies that do not utilize them. Thus, this program may actually defeat the efforts of environmental conservation.

According to Japan's environmental accounting (EA) guidelines of 2005, EA "aims at achieving sustainable development maintaining a favorable relationship with the community, and pursuing effective and efficient environmental conservation activities," (Japan's Environmental Accounting Guidelines, 2005 p.3). The role of environmental accounting within Japan is divided into internal and external functions. Internal functions deals with the management of environmental conservation costs and activities. It promotes effective environmental conservation activities through an adequate decision making process. External functions of the EA include mandatory public reporting of environmental costs and effects of a company. By disclosing a quantitative measurement of such activities, it opens up the company to further progress. Quantitative measures are environmental conservation costs referring to investment and expenses. Such quantitative categories help companies keep track the progress in the processes. …

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