VII Consumer Behavior

T h e J o u r n a l o f D e v e l o p i n g A r e a s Volume 53 No. 3 Summer 2019

DOES ENVIRONMENTAL REPORTING

MATTER?

Sin Huei Ng

Xiamen University Malaysia, Malaysia

Boon Heng Teh

Multimedia University, Malaysia

Shi Harn Ooi

Tze San Ong

Wei Ni Soh

Universiti Putra Malaysia, Malaysia

ABSTRACT

International media attention and increased public concerns have created global environmental

issues, thus, companies now face great pressure to engage in environmental activities while

environmental reporting (ER) acts as a medium for disclosure of their environmental responsibility

in fulfilling the social needs. Therefore, embarking on effective environmental engagement will

sustain better life. Thus, this study purposes to evaluate the impacts of ER practices on financial

performance using the outcome indicators of return on equity (ROE), return on assets (ROA) and

earnings per share (EPS). Furthermore, this study also makes comparison between companies in

ESI and non-ESI. This study has employed the stratified random sampling technique in order to

determine the sample size from the population of ESI and non-ESI companies. Content analysis

was adopted to examine the annual reports of 78 Malaysian PLCs from years 2010 until 2014

through the usage of measurement of volume in terms of sentences and the disclosure index to

determine the quantity of ER and quality of ER respectively. The analysis shows that there is no

significant relationship between ER practices and ROE and ROA, whereas there is a significant

positive relationship between the existence of ER and EPS. For ESI companies, there is significant

positive relationship between existence of ER and financial performance while a significant

negative relationship is found between quality of ER and financial performance. On the other hand,

there is no evidence of significant relationship to be found between ER practices and financial

performance of non-ESI companies. Furthermore, it can be clearly seen that the existence of ER is

higher in ESI companies as compared to non-ESI companies. This research has shown that the

number of disclosing companies is promising, however the quantity and quality of ER is still

unfavorable where the PLCs are still lacking in providing environmental information needed by the

public. Nevertheless, since ER is still a voluntary move in Malaysia, regulators are advised to take

initiatives to enhancing this practice through communicating the benefits to the companies and at

the same time ensure the mandatory adoption of the ER practices in terms of the quantity and

quality.

JEL Classifications: M4, Q5

Keywords: environmental reporting practices, financial performance, public listed

companies, environmentally sensitive industries, non-environmentally sensitive

industries, Malaysia

Contact author’s email address: shng@xmu.edu.my

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INTRODUCTION

Environmental reporting (ER) exists is various titles subject to its motive and details, for

example “sustainability reporting”, which includes reporting on the three pillars of social,

economic and environmental aspects. In a very specific manner, it is a statement that

contains all environmental-related information. ER is actually a subset of the corporate

social responsibility (CSR). In many cases, sustainability reporting practices have

focused largely on environmental issues (ACCA, 2010). ER makes organizations appear

to be more accountable for the economic, environmental and social consequences of their

activities. Amplified public awareness has prompted government’s action under the

Malaysia Plan by increasing regulations, provision of environmental incentives and

rewards, and increasing existence of ISO 14001 companies. For instance, Environmental

Quality Act 1974 allows for stiffer penalties for various environmental offences and

under Section 37 of the Act, the Department of Environment is empowered to request

environmental information from companies.

Malaysian government had put up efforts at protecting the environment since the

eighties. The Fourth Malaysia Plan (4MP) in 1980 has devoted a clause for preserving the

natural environment. In the year 1999 and 2001, MASB published MFRS 101 and MFRS

137 (formerly known as MASB 1 and MASB 20) respectively. MFRS 101 was to

encourage companies to present additional information, including environmental reports

to assist user in better decision making. Correspondingly, Malaysian Code on Corporate

Governance (MCCG) first issued at March 2000 which marked a significant milestone in

corporate governance reform in Malaysia has addressed the environmental concern in the

Code. The introduction of the MCCG listing requirements was one of the drivers for

environmental reporting in Malaysia. In 2003, ACCA’s Environmental Reporting

Guidelines had explicitly made reference to environmental reporting and it is known as

Sustainability Reporting Guidelines starting 2005. This guideline is a comprehensive

introduction to the subject of sustainability reporting as it contains the background,

components and applications to sustainability reporting. A series of workshops were also

rolled out nationwide by ACCA and Department of Environment (DOE) to educate

Malaysian companies on the needs and benefits of sustainability reporting. In the latest

development, Bursa Malaysia had finally made CSR mandatory in 2006 effective on

companies’ annual reports for the financial year ended 2007 onwards with ER as one out

of four focal areas of disclosure. Prior to 2007, the CSR in annual reports by Malaysia

PLCs was done on a voluntary basis.

Over the last twenty years, there are two major incidents of the Bhopal chemical

leak (1984) and the Exxon Valdez oil spill (1989) which had harmed human and marine

life. The more recent examples of such comparable incidents include a series of

explosions that occurred at The Port of Tianjin in August 2015 and Kuantan bauxite

mining at the year end of 2015. All of these incidents had led to unsatisfactory feelings

due to irresponsible business practices. Malaysia, as one of the developing countries

which has enjoyed consistent growth over the last few decades also encounters issues

such as deforestation, pollution of inland and marine waters, soil and coastal erosion, ,

along with air pollution, water pollution and the problem of waste disposal (WWF, 2015).

Although many companies in Malaysia are aware of the importance of environmental

practices, it is evident that the disclosures of environmental activities are still not widely

61

implemented. The reason is that companies are still not convinced on the benefits of these

activities. Therefore, ACCA Malaysia rolled out the first Malaysian Sustainability

Reporting Awards (MaSRA) (formerly known as MESRA) back in 2002, being a staunch

advocate of sustainability reporting for many years to address the importance of

environmental disclosures. In addition, ACCA (2013) also stated that their participants

agreed that it instills discipline and helps a company think about and define its long-term

vision and raises awareness of sustainable practices in the whole organization.Sulaiman

et al. (2014) opined that unlike firms in the developed world that are willing to develop

their environmental reporting practices voluntarily; those in the developing nations leave

it to the government to enforce such practices. Lately, as part of 9th Malaysian Plan

(2006-2010), starting from 2007, there is a requirement that all public listed companies

are demanded to publish CSR engagements in their annual reports. Despite of CSR being

made mandatory, adoption of ER is still a voluntary move which depends upon decision

of PLCs. For this reason, this research is concerned with the ER practices for the period

after CSR was mandated to determine whether there is any improvement in the

environmental disclosures by PLCs in Malaysia.

Last but not least, most of the public will be more focused on companies which

have greater impact on environments in terms of their business practices especially those

in environmentally sensitive industries (ESI). On the contrary, the public may not have so

much concern on the environmental activities carried out by non-environmentally

sensitive industries (non-ESI). Additionally, most of the researchers pay less attention to

the comparison of environmental disclosures and its impacts towards firm performance

between ESI and non-ESI. As such, this study aims to make comparison between both

industries in terms of ER practices and its impacts on the financial performance.

Accordingly, the research objectives are:

• To evaluate the impacts of ER practices on financial performance among Malaysia PLCs.

• To compare the ER practices between PLCs in ESI and non-ESI.

• To study the impacts of ER practices on financial performance between PLCs in ESI and non-ESI.

LITERATURE REVIEW

According to O’Donovan (2002), legitimacy theory is constructed on the basis that for

companies to continue operating successfully, they must act within the confines of what

society recognizes as socially tolerable conduct. Failure of organizations to meet those

expectations may result in community dissatisfaction, criticism and penalties being

incurred that restrict the activities of the firm (Abd Rahman et al., 2013). Subsequently, it

will affect the performance and also the sustainability of the companies in the future.

Therefore, ESI companies where their activities are typically more detrimental to the

environment are expected to disclose more environmental information as compared to

non-ESI. Movements like publishing more environmental disclosures in annual report

exhibit their obligation and determination to be more environmentally accountable to the

societies.

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As most of the prior research (Mokhtar & Sulaiman, 2012) had been focused on

only one theory which is legitimacy theory, this study aims to provide more insightful

explanation regarding environmental reporting behavior by using two other theories

which are stakeholder theory and resource-based view theory. According to Freeman

(1984), the basic proposition of the stakeholder theory is that the firm’s success is

dependent upon the successful management of all the relationships that a firm has with its

stakeholders. Recently, more and more stakeholders are giving pressure to the

organization regarding the ER due to awareness of the importance of the environment to

our society. The reporting practices seem to serve as a medium for companies to

communicate their corporate accountability to various stakeholder groups, aiming to

enhance business-stakeholders relationship. On the other hand, resource-based view

theory (RBVT) expresses the connections among companies’ reserves, competencies, and

competitive advantage (Hart, 1995). According to Burton and Rycroft-Malone (2014),

the ‘imperfect distribution’ of these resources across firms, or organizations within a

similar market is believed to account for variation in performance, usually in terms of

market share. For example, intangible factors such as reputation and leadership in

environmental affairs may increase sales among customers who are environmentally

sensitive and this will augment profits (Sulaiman et al., 2014). As a consequence, firms

with better environmental reputation are assumed to have greater market share in the long

run.

ENVIRONMENTAL REPORTING

Environmental reporting (ER) indicates the accountability of a company to disclose the

environmental information to the public. Today, business leaders do not only need to

maximize shareholders’ value through profitability but are also responsible for utilizing

the power and resources to better care for society and the planet. In fact, the ER practices

in Malaysia are still in its nascent stage. According to Bursa Malaysia (2007),

environment has the least information disclosed among the four CSR dimensions.

Compliance with mandatory ER is associated with the volume and quality of

environmental disclosure (Criado-Jimenez et al., 2008). With this, the research looks

into the ER practices for years 2010 – 2014 which is 3 to 7 years after CSR has been

mandated as there is a possibility that CSR framework issued by Bursa Malaysia in 2007

have certain effect on the extent of ER by PLCs. Furthermore, ACCA (2004) have proved

that the number of companies providing information are increasing, but the level is rather

low. Due to cost saving, many were even copy and paste from previous years (Ong et al.,

2016). Mokhtar and Sulaiman (2012) stated that companies fail to produce good

environmental reports because the environmental information reported was generally in

declarative form. This is consistent with few studies by (Abd Rahman et al., 2013; Mohd

Said et al., 2015). Nik Ahmad and Sulaiman (2004) also reveal that on average the

companies disclose approximately 5 sentences in their study of 140 Malaysian PLCs

while Buniamin et al. (2008) reported that on average Malaysian companies disclose 4.7

sentences in year 2005.

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ENVIRONMENTAL SENSITIVITY

In this research, PLCs will be grouped under ESI and non-ESI to differentiate the

environmental impact contributed by these companies. ESI companies are those

companies whose activities are likely to cause damage to the environment whereas non-

ESI companies have less impact towards the environment. ESI consist of few industries,

namely industrial products, consumer products, plantation, construction, property, trading

and services, mining, and infrastructure. According to Elijido-Ten (2004), firms that

belong to ESI are predicted to provide more environmental disclosures because they have

more pressure to be environmentally responsible in order to minimize government

sanctions. Therefore, they are likely to provide more and better quality ER as compared

to non-ESI companies. This is in line with the studies by (Brammer and Parvelin, 2008).

Moreover, the study done by Alrazi et al. (2009) found that the quality of ER in the ESI

increased significantly from 1999 to 2006. In Sulaiman et al.’s (2014) study, quality of

ER in ESI companies was found to be better than those companies in non-ESI. In contrast,

Ong et al. (2016) indicated that less environmentally sensitive industries disclosed more

and higher quality environmental information. On the other hand, no significant

difference is found in Mokhtar and Sulaiman (2012) study in the level of environmental

disclosure between PLCs in environmentally sensitive industries and less sensitive

industries. There are also limited studies regarding the comparison between ESI and non-

ESI in terms of impact of ER practices on financial performance. Given these situations,

present study seeks to provide additional insight in examining the differences in terms of

ER practices and its impact on financial performance between ESI and non-ESI.

FINANCIAL PERFORMANCE

Financial performance refers to the function of executing or accomplishing financial

activity and the extent to which financial objectives are being attained (Trivedi, 2010). In

this study, three financial performance measurements are being used, which are return on

assets (ROA), return on equity (ROE) and earnings per share (EPS). ROA is an indicator

of how profitable a company is relative to its total assets and gives an idea as to how

efficient management is at using its assets to generate income whereas ROE is more than

a measure of profit; it is a measure of efficiency. EPS is a market prospect ratio that

measures the amount of net income earned per share of stock outstanding, serving as an

indicator that shows how profitable a company is on a shareholder basis. Therefore, a

larger company's profits per share can be compared to smaller company's profits per

share.

RELATIONSHIP BETWEEN ENVIRONMENTAL REPORTING

PRACTICES AND FINANCIAL PERFORMANCE

There has been a heated and long-running debate regarding the relationship between ER

and financial performance of company. A review of empirical studies have reported

mixed results on relationship between ER practices and financial performance. Yu et al.

(2011) found that environmental information disclosure has positive impact on economic

performance, which is measured by Tobin’s Q. Consistent with Yu et al. (2011), Saleh et

64

al. (2011) also found a positive and significant related dimensions of CSR and corporate

financial performance. In a like manner, the research pursued by Assaf et al. (2012) on

hospitality industry have also proven that ER has a significant impact on financial

performance. Another study carried out by Ong et al. (2015) examined the influence of

environmental disclosures on the financial performance of public listed Malaysian

manufacturing companies concluded that environmental disclosures is significantly and

positively correlated with financial performance of manufacturing companies. Later on,

Ong et al. (2016) and Nma Ahmed et al. (2016) found that environmental disclosure has

significant positive impact on EPS whereas the former found specifically that the quality

of ER has positive relationship with EPS. The most recent research performed by

Deutsche Asset & Wealth Management (2015) revealed that the large majority of studies

report a positive relation between environmental, social and governance (ESG) criteria

and corporate financial performance, and the relation appears stable over time. The study

combines the findings of about 2,200 individual studies, making it the most extensive

overview of academic research on this topic. In combination, 35.3% of research has

showed positive relationship in this topic. Focus on environmental criteria, 58.7% of the

research report a positive relationship between ER and financial performance.

In contrast, few researches stated that there is negative relationship between

level of disclosure of environmental information and financial performance (Aaydi,

2011). Last but not least, Abd Rahman et al. (2009) provided evidence that the

performance of the company has no relationship with the types of environmental

disclosure. Saleh et al. (2010) found no significant relationship between CSR and

financial performance. Alikhani and Maranjory (2013) indicated that there is no

significant relationship between level of environmental disclosure and financial

performance. Similarly, Md Nor et al. (2016) reported there is no significant relationship

between ROA, ROE and EPS and ER. Particularly, quality of ER does not seem to have

significant relationship with ROA (Sulaiman et al., 2014).

In sum, literature as a whole recognizes an ambiguous relationship between ER

and financial performance. Researchers have proposed that the mixed results might

because of the different means of measurement used for the variables (Najah & Jarboui,

2013). Yet, most of the prior research found a significant relationship between ER and

financial performance. Therefore, the main hypothesis is there is significant relationship

between ER practices (existence, quality &quantity) and financial performance (ROE,

ROA & EPS).

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FIGURE 1: PROPOSED RESEARCH FRAMEWORK

RESEARCH METHODOLOGY

The target population of this study comprises of all the Malaysian Public Listed

Companies on Bursa Malaysia from years 2010 until 2014. The sample size is determined

by adopting stratified random sampling technique, where the population is first divided

into strata, namely ESI and non-ESI. After that, 50 samples are randomly selected within

each stratum using the sampling tools under data analysis function available in Microsoft

Excel. All financial firms are excluded since they are subjected to peculiar laws and

regulations compared to other companies. The final sample consists of 78 Malaysian

PLCs and secondary data is extracted using the content analysis method from the annual

report of these companies. Content analysis method is said to be the most appropriate

method of analysis in examining the incidence of ER (Nik Ahmad & Sulaiman, 2004).

Consistent with the utilization of content analysis method by previous researchers (Abd

Rahman et al., 2013; Sulaiman et al., 2014), and it is used as the research approach in the

present study.

Examining quantity of ER usually involves three methods of measurement under

content analysis, namely measurement of volume in terms of words, measurement of

volume in terms of sentences and lastly measurement of volume in terms of proportions

of a page. This study has adopted measurement of volume in terms of sentences because

it does convey meaning, unlike individual words which do not convey any meaning. A

checklist was adopted from Mokhtar and Sulaiman (2012) to identify meaningful

sentences pertaining to environmental information disclosed in the annual reports. The

checklist consists of 4 sections which are environmental pollution, aesthetics, energy and

others environmental-related information. For the quality of ER practices, a disclosure

index adopted from Mokhtar and Sulaiman (2012) generated from Environmental

Reporting Score sheet of ACCA MaSRA was used. A score of “1” was assigned if the

related criteria are being disclosed by the company while “0” is given if there is no

evidence found. The disclosure index has 2 main categories, namely completeness and

66

credibility. Under completeness, there are 32 criteria to be evaluated while another 38

criteria for credibility. Thus, these make up the total score of 70 marks. The study

employed 78 PLCs as its sample size, which consists of 38 ESI companies and 40 non-

ESI companies. Thus, for ESI companies, the possible total score would be 2,660

(70*38)(100%) marks if the company disclose all the items in the disclosure index while

the total score for non-ESI companies would be 2,800 (70*40) (100%). For a 5 year

period, the possible total score for ESI and non-ESI would be 13,300 (2,660*5) and

14,000 (2,800*5) respectively.

The selection of firm size as control variable is directed by prior literature

(Sulaiman et al., 2014). This is because larger firms with more resources would properly

exhibit more and superior ER as they tend to bound by advanced public scrutiny and so

would be more sensitive to stakeholder requests (Ong et al., 2016). Furthermore, sound

financial foundation allows the bigger firms to hold greater responsibility with regards to

social activities as well as to remaining sustainable (Mohd Said et al., 2015). Ong et al.

(2016) also found that firm size has a significant and positive relationship with quantity

and quality of ER. Conversely, Abd Rahman et al. (2013) stated that the size of the

company is negatively related with ROA and ROE.

This study used multiple regression analysis as shown by the model below:

FP = α + β1EXT + β2QTY + β3QLTY + β4SIZE +ε

Where:

FP= financial performance of the company (measured by ROE, ROA and EPS)

α= intercept

β= regression coefficient

EXT= existence of ER

QTY= quantity of ER

QLTY= quality of ER

SIZE= firm size

ε= disturbance term

FINDINGS AND DISCUSSIONS

DESCRIPTIVE ANALYSIS

Table 1 portrays the companies’ profile according to Bursa Malaysia’s industrial

classification. The sample consists of 38 ESI companies from various sectors such as

consumer products, industrial products, construction and properties, and trading or

services. On the other hand, 40 non-ESI companies came from REITs, technology and

other sectors.

67

TABLE 1: COMPANIES’ PROFILE

Sectors Total

ESI:

Consumer Products 10

Industrial Products 14

Construction and Properties 7

Trading or Services 7

38

Non-ESI:

REITs 12

Technology 24

Others 4

40

Total 78

EXISTENCE

Based on Table 2, the number of disclosing companies in ESI has shown some

fluctuations whereby the number of disclosing companies drop from 32 PLCs to 31 PLCs

in year 2011 and then increase to 37 PLCs in year 2013, later on it decreases again to 36

PLCs. In contrast, the disclosing companies in non-ESI are lesser as compared to

disclosing companies in ESI. It first experienced a gradual growth from 23 PLCs to 31

PLCs in year 2013 and then a small decrease to 30 PLCs in year 2014. However, the

numbers of disclosing companies are relatively high as compared to previous research

(Mokhtar & Sulaiman, 2012), where over 90% of ESI companies are engaged in

environmental reporting while almost 80% of non-ESI companies are disclosing at least

one sentence of environmental information.

TABLE 2: DISCLOSURE AND NON-DISCLOSURE OF ER ACCORDING

TO INDUSTRY SENSITIVITY

Industry

Sensitivity Year

Disclosing PLCs Non-disclosing PLCs Total %

Total % Total %

ESI

2010

2011

2012

2013

2014

32

31

35

37

36

84

82

92

97

95

6

7

3

1

2

16

18

8

3

5

38

38

38

38

38

100

100

100

100

100

TOTAL 190 100

Non-ESI

2010

2011

2012

2013

2014

23

25

27

31

30

58

63

68

78

75

17

15

13

9

10

42

37

32

22

25

40

40

40

40

40

100

100

100

100

100

TOTAL 200 100

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QUANTITY

As illustrated from the line chart (Figure 2) below, the number of sentences disclosed by

the ESI companies increase gradually from 2010 to 2014, from 135 sentences being

disclosed in year 2010 to 203 sentences in year 2014. Average sentences disclosed by one

ESI company per year would be 4.52 sentences. For non-ESI companies, the number of

sentences disclosed in their ER also shows an upward trend and the quantity is almost the

same with ESI companies. Surprisingly in year 2011 and 2012, non-ESI companies

disclose more information regarding environmental as compared to ESI companies.

Average sentences disclosed by one non-ESI company per year would be 4.3 sentences.

The result is out of the expectation in that ESI companies did not prove to have more

disclosure in terms of quantity as compared to non-ESI companies. This may be because

the companies still do not see the advantages of disclosing more environmental

information in their annual report. Moreover, more disclosure means that the company

need to incur more costs on it, therefore they only disclose sufficient amount in order to

meet Bursa Malaysia’s requirements. This is in line with Jaffar et al. (2007) opinion

where the authors said that companies usually prefer to limit their disclosures.

FIGURE 2: QUANTITY OF ER

2010 2011 2012 2013 2014

ESI 135 152 166 202 203

Non-ESI 133 163 174 188 202

0

50

100

150

200

250

N u m b e r o f S e n te n ce s

Quantity of Environmental Reporting

QUALITY

Disclosure index adopted from Mokhtar and Sulaiman (2012) was used. Based on Figure

3 below, it can be seen that the quality of the ER of ESI companies shows a steady

upward trend over 4 years. In line with this, the quality of ER of non-ESI also climbs up

progressively over 5 years although the score is relatively lower than ESI companies. In

accordance with the expectation, quality of ER in ESI is higher than non-ESI. Due to the

fact that public are more interested and concerned about environmental information

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disclosed by ESI companies, their disclosure will be higher in quality so that it meets the

expectation of public and investors.

FIGURE 3: QUALITY OF ER

2010 2011 2012 2013 2014

ESI 418 425 432 457 453

Non-ESI 364 380 389 419 423

050 100150 200250 300350 400450 500550 600650 700750 800

S co re o f D is cl o su re I n d e x

Quality of Environmental Reporting

Overall, ESI companies scored better than non-ESI companies in both “completeness”

and “credibility” based on the disclosure index score developed. Under “completeness”,

all ESI companies have disclosed the corporate profile in their annual report, thus the

score is 100% and almost all non-ESI companies have their corporate profile disclosed

too, it is indicated in the high score of 98%. This is because corporate profile usually is

the most important information in the annual report. Many companies are also paying

attention to the scope of the environmental report, which includes purpose of the report,

boundaries of the report, reporting period and reporting process, where both ESI and non-

ESI have earned a high score which are 56% and 44.6% respectively.

Besides that, in terms of “credibility”, companies are keen to headline their

attainments in relation to environmental practices. This will shows that the company is

performing well and they want to share this good news to the public. On the other hand,

none of the PLCs from both ESI and non-ESI disclose any information regarding the

contact person in charge of environmental issues, environmental financial statements and

full cost accounting, use of stakeholder feedback in the ER, and third party statement. As

a comparison, ESI companies are more aware of environmental contingency planning and

environmental risk assessment, compliances/non-compliances record with environmental

legislation and application of environmental guidance and/or standards than non-ESI

companies, because their activities might threaten the environment, so they actively

engage in those elements to gain the trust from the public.

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REGRESSION ANALYSIS

ALL COMPANIES (ESI AND NON-ESI)

In examining the relationship between independent variables (EXT, QTY, and QLTY)

towards the ROE of companies, the result shows there is no significant (p>0.05)

relationship between all the variables. It indicates that shareholders do not earn more

from their investment in the company if they actively engage in environmental reporting.

The result (Table 3) is inconsistent with Abd Rahman et al. (2013) where they found that

quantity of ER has significant relationship towards ROE. When ROA is being used as

dependent variable, there is also no significant relationship between EXT, QTY, and

QLTY and ROA. This result is consistent with Najah and Jarboui (2013), but inconsistent

with Teoh et al. (2003) which shown a significant and positively correlated result. On the

other hand, when dependent variable is being tested with EPS, there is a significant

positive relationship between EPS and EXT with a t-value of 2.15. Therefore, there is

sufficient evidence to support H3a. This is not consistent with studies carried out by

Alikhani and Maranjory (2013) though it is consistent with Nma Ahmed et al. (2016)

which proved that environmental disclosure has significant positive impact on EPS.

TABLE 3: RESULT OF REGRESSION TEST FOR ALL COMPANIES

β t-value

ROE

EXT 0.0244888 1.14ns

QTY 0.0023833 0.91ns

QLTY -0.005157 -1.55ns

SIZE 0.020623 1.62ns

constant -0.232569 -0.32ns

ROA

EXT 0.0239918 1.78ns

QTY 0.001645 1.00ns

QLTY -0.0035801 -1.72ns

SIZE -0.0061346 -0.77ns

constant 0.0935306 2.06*

EPS

EXT 4.866033 2.15*

QTY -0.0631767 -0.23ns

QLTY -0.3769368 -1.07ns

SIZE 6.33634 4.73***

constant -25.40405 -3.33***

*P<0.05 (significant); ** P<0.01(significant); *** P<0.001 (highly significant); ns non-significant

ESI COMPANIES

For ESI companies, Table 4 shows that there is significant relationship between EXT and

QLTY and ROE, ROA and EPS. Hence, H1a, H1c, H2a, H2c, H3a, H3c are being

supported. On the contrary, QTY has no significant relationship with financial

performance. In particular, EXT has significant positive relationship with ROE, ROA and

EPS with t-value of 4.75, 4.71 and 3.83 respectively. The result is consistent with Yu et

al. (2011), however it is not consistent with Md Nor et al. (2016) which stated that there

is no significant relationship between those variables. In contrast, QLTY of

environmental reporting have a significant but negative influence on the financial

performances of the companies with t-value of -2.31, -2.13 and -1.98 correspondingly.

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TABLE 4: RESULT OF REGRESSION TEST FOR ESI COMPANIES

β t-value

ROE

EXT 0.1656761 4.75***

QTY 0.0059391 1.43ns

QLTY -0.0107119 -2.31*

SIZE 0.0080884 0.44ns

constant -0.042187 -0.42ns

ROA

EXT 0.0974719 4.71***

QTY 0.0023754 0.96ns

QLTY -0.005848 -2.13*

SIZE 0.0013832 0.13ns

constant 0.0006748 0.01ns

EPS

EXT 16.74024 3.83***

QTY 0.4708228 0.90ns

QLTY -1.149146 -1.98*

SIZE 4.061295 1.77ns

constant -16.22295 -1.28ns

*P<0.05 (significant); ** P<0.01(significant); *** P<0.001 (highly significant); ns non-significant

NON-ESI COMPANIES

For non-ESI companies, the result (Table 5) shows that nothing is detected to be

significantly associated with financial performance of the companies. Thus, none of the

hypotheses were supported for non-ESI companies. This is in accordance with the study

of Md Nor et al. (2016) and Ong et al. (2016).

.

TABLE 5: RESULT OF REGRESSION TEST FOR NON-ESI COMPANIES

β t-value

ROE

EXT -0.0442242 -1.49ns

QTY 0.0000644 0.02ns

QLTY 0.0012102 0.24ns

SIZE 0.0188519 1.09ns

constant -0.0124321 -0.12ns

ROA

EXT -0.0109027 -0.56ns

QTY 0.0004685 0.20ns

QLTY 0.0000918 0.03ns

SIZE -0.0196967 -1.74ns

constant 0.1693122 2.58**

EPS

EXT -2.747603 -1.08ns

QTY -0.2091912 -0.70ns

QLTY 0.21556 0.50ns

SIZE 7.786879 5.28***

constant -34.48177 -4.02***

*P<0.05 (significant); ** P<0.01(significant); *** P<0.001 (highly significant); ns non-significant

72

RESULTS OF REGRESSIONS AND CONCLUSIONS

As the study observed sample companies from year 2010 to 2014, which is at least after 3

years since Bursa Malaysia implemented the requirements, therefore there is more

compliance from the companies. Furthermore, it can be clearly seen that the existence of

ER is higher in ESI companies as compared to non-ESI companies. This is consistent

with concept of legitimacy theory because people are more concern about the activities

done by ESI companies as they directly affect the environment, thus ESI companies are

more likely to disclose the environmental information which show that they are taking

care of the environment to gain confidence and good reputation among public. Although

the quantity of ER is increasing over five years, a company just disclose 4.405 sentences

on average per year. The situation is even worse than study carried out by Nik Ahmad

and Sulaiman (2004) and Buniamin et al. (2008), where both of them reported an average

of nearly 5 sentences before Bursa Malaysia’s requirements. This may indicate the need

to review the effectiveness of the requirements by regulatory agencies. By looking more

detail into the score of elements in the disclosure index, although some companies have

already disclose a substantial amount in some of the elements, the total score for ESI and

non-ESI companies are only 16.4% and 14.1% correspondingly, out of 100% . To

conclude, the score of disclosure index by ESI companies is still very low (Mohd Said et

al., 2015) that the companies still have a huge gap to improve in their quality of

environmental disclosure.

In examining the relationship between ER and financial performance, there is no

significant relationship between ER with ROE and ROA. This may due to low

environmental consciousness among Malaysian consumers. Despite being exposed to

messages of environmental issues that encourage consumers to be environmentally aware,

yet many consumers still do not adopt environmentally friendly behaviors (Yahya et al.,

2015). The consumer do not consider the environmental impact of the products or

services offered by the company, so no matter the company engage or not in protecting

the environment, the consumer will not change their purchase decision and thus it will

not affect the financial performance of the company. However, existence of ER proved to

have significant and positive impact towards EPS of a company. This is supported by

Md Nor et al. (2016) where the researchers stated that disclosing the environmental

information would gain market benefits and the facility to increase earning from

environmental improvements. For ESI companies, there is significant positive

relationship between EXT and financial performance. As public is always more

concerned about business activities carried out by ESI companies, so if they carry out

environmental activities and disclose it in the annual report, public perceived a good

corporate image of the company. This will in turn built up their trust and loyalty towards

the company and more likely to continuously purchase the products and invest in the

same company. Subsequently, revenue of company increased hence contributes to a

better financial performance. Hence, those non-disclosing companies are encouraging to

participate in the ER practices to reap the benefits. Surprisingly, a significant and

negative relationship is found between QLTY and all other financial indicators. This may

be because in order to provide better quality environmental information, company will

incur additional cost and thus their financial performance may not be look good. For non-

ESI companies, there is no significant relationship between ER practices and financial

73

performance of the companies mainly because the general public or investor are less

interested in their environmental reporting since their business activities do not directly

contribute to the environmental problems or they only contribute little environmental

issues.

In conclusion, this research has shown that the number of disclosing companies

is promising, however the quantity and quality of ER is still unfavorable where the PLCs

are still lacking in providing environmental information needed by public. This might be

because of low awareness and interest by PLCs about environmental preservation and

some of the PLCs are unable to see the perceived benefits from ER practices. As a

consequence, various parties should take actions to motivate the company in increasing

the quantity and quality of ER. Regulatory agencies and policy makers can consider

making the ER practices mandatory to boost the level of ER practices in Malaysia, so that

the ER practices in Malaysia would be standing in the same line as other developed

countries of the world.

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