Managing corporate environmental and financial performance: new insights from government ownership

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Sustainable environmental awareness is growing and developing in society. Environmental issues are one of the main topics discussed at G20 Summit held in Osaka-Japan, which also brings this awareness to the international level. Supported by the commitment of world leaders to the Sustainable Development Goals, environmental balance is an integral element of the three components. The government even encourages companies involved in industries with the highest carbon emission contributions to reduce their carbon emissions, one of which is by disclosing the carbon emissions produced to the public (Nasih et al., 2019).

Increasing environmental performance is an additional cost for companies that reduces profitability (Basuki & Irwanda, 2016). In contrast, others argue that improving ecological performance will encourage cost savings and increase income and financial performance (Pintea, Stanca, Achim & Pop, 2014). Empirical evidence regarding the positive relationship of perceived environmental performance to financial performance has been widely studied (Lee et al., 2016; Song, Zhao, & Zeng, 2017; Nishitani K & Kokubu K., 2012; Russo & Fouts 1997). Sutopo (2018) found that companies that won the Sustainability Reporting Award (SRA) had higher EPS values and share prices than non-SRA companies. Ahmed et al. (2019) also explain that environmental, social and governance work is associated with higher financial performance (return on assets). The positive impact between environmental performance and financial performance can be explained through resource-based theory. Based on the nature of resource-based theory, companies that maintain resources and develop capabilities ultimately gain a competitive advantage (increased productivity and efficiency) in facing environmental challenges (Siddique & Sciulli, 2018). Thus, the application of pollution prevention that focuses on processes, environmental efficiency to reducing waste can reduce environmental impact while improving company performance through cost reduction (Huang, Wong & Yang, 2014)

Previous research has found that environmental performance has a positive impact on financial performance (Lee et al., 2016; Song, Zhao, & Zeng, 2017; Nishitani K & Kokubu K., 2012; Russo & Fouts 1997). Concern for environmental problems can be a competitive advantage of a company among its competitors (Gallego-Álvarez et al., 2015). Environmental awareness can also improve a company’s reputation both in the eyes of customers and employees (Porter & Kramer, 2011; Flammer, 2015).

Research conducted by Mardijuwono et al., (2020) examined the relationship between environmental performance, government ownership, and corporate financial performance. This study consists of 151 companies listed on the Indonesia Stock Exchange and following the proper ranking held by the Indonesian Ministry of Environment for the period 2014-2017. This research uses evidence that State-Owned Enterprises have not focused much on research related to environmental and financial performance. Besides, this study also uses PROPER criteria to measure environmental performance. This study finds that environmental performance has a positive effect on financial performance in terms of three measures, namely ROE, ROA, and TOBINS Q.

Interestingly, this study finds that companies with government ownership have a negative relationship with financial performance. It indicates that government ownership is an extension of the government which does not focus primarily on economic performance but a sustainable environmental balance. The results of this study have implications for company management on how environmental issues are essential points that need to be considered to improve company performance. For the government, the results can also be used as input in making ecological management policies.

Author: Sigit Kurnianto

Link: https://pjms.zim.pcz.pl/resources/html/article/details?id=206310

Mardijuwono AW, Kurnianto S., Basuki, Rahman WN, Sucahyati D. 2020. Managing The Firm Environmental and Financial Performance: New Insight From Government Ownership, Polish Journal of Management Studies 21 (2): 256-267.

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