Impact of Environmental Award &amp; Financial Performance on Environmental Disclosure Quality: A Case Study of Listed Companies in Pakistan

doi:10.21203/rs.3.rs-4841335/v1

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Research Article

Impact of Environmental Award & Financial Performance on Environmental Disclosure Quality: A Case Study of Listed Companies in Pakistan

https://doi.org/10.21203/rs.3.rs-4841335/v1

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As global environmental concerns have grown, so too have calls for more corporate environmental transparency and responsibility. Businesses are participating in programs such as earning environmental awards and improving their financial performance to promote their company image and demonstrate that they are effective environmental stewards. This research examines the nexus between environmental awards, environmental disclosure quality, and the firm performance of non-financial companies. This research aims to determine if environmental disclosure, indicative of accountability and transparency, is affected by awards for environmental success. The study incorporated quantitative information from 300 non-financial businesses selected randomly to serve as a sample and anticipate beginning operations between 2016 and 2020. The findings suggest a connection between environmental disclosures' quality and environmental awards' attainment. Similarly, environmental disclosure quality is not affected by financial performance. The conclusions of this study could stimulate more accountable and responsible business practices, which would enhance our collective efforts to create a more sustainable and environmentally friendly future.

SUBJECTS

Environmental Management; Environment & Business; Environmental Economics; Business, Management and Accounting

Environmental Award

Financial Performance

Environmental Disclosure Quality

A firm’s objective to make money dramatically impacts its policies and methods to protect the environment and how much it shares essential information with others. Organizations work hard to achieve financially sustainable success to stay in business and grow in the long run. Everyone knows a company's profits can significantly affect its business ethics and practices, especially in protecting the natural environment (Deswanto & Siregar, 2018). Firms that make money are more likely to invest in tools that are good for the environment, use methods that are good for the environment, and let the public know about their efforts. On the other hand, businesses that are having money problems may put more importance on finding ways to cut costs than they do on being environmentally responsible and honest (Deswanto & Siregar, 2018)

People have become more aware of the need to act in good ways for the earth in recent years. In the past few years, more and more companies and groups, both public and private, have built environmental responsibility and openness into their daily operations. Because of this, businesses need to do ecological disclosure quality to inform their clients about their environmental success and how much they care about protecting the environment (Rupley et al., 2012). Environmental disclosure quality is the practice of making public information about a company's actions, policies, and effects on the environment. The goal is to encourage more openness and responsibility.

Only a little research has been done on the specifics of non-financial enterprises listed on the Pakistan Stock Exchange (Khurshid et al.). However, earlier studies have found a link between environmental awards, financial performance, and environmental disclosure quality. Pakistan is a developing country, so its surroundings and business conditions differ from those of other countries (Mahmood et al., 2017). To gain complete knowledge of the problem, it is essential to look into how environmental awards and firm performance affect the standard of environmental disclosure made by non-financial businesses listed on the PSX.

The quality of a company's environmental transparency depends on how much environmental information it shares publicly with its stakeholders and how correct, complete, and valuable that information is. This phrase was first used by the Environmental Protection Agency (EPA). It shows how well companies can explain their environmental performance, actions, goals, and effects clearly and convincingly (Baalouch et al., 2019). The thought of giving good environmental information came up as part of reporting on business social responsibility (CSR). Corporate social responsibility reports (CSR reports) show a company’s commitment to sustainable practices and shareholder involvement by including information not about money (Onkila & Sarna, 2022). The idea of giving good environmental information came up in this larger area's context.

The culture of a company has a significant effect on the quality of environmental disclosure. Environmental disclosure quality is more likely to be a priority and be successful in companies with a strong environmental ethos and a mindset that puts a high value on sustainability (Brammer & Pavelin, 2008).

By looking at the firm performance, many studies have been done to determine how a company's financial performance affects environmental disclosure quality. A study by Smith et al. (2017) to see if the firm’s performance of Fortune 500 companies was linked to how well they told the public about their environmental impacts. The results show that companies doing well are more likely to be honest and thorough in their environmental disclosure quality, which suggests that the two are related in a good way. This conclusion could be because companies that make money are more likely to spend money on ethical practices and keeping their books open.

2.1. Empirical evidence between environmental awards, firm performance, and environmental disclosure quality

Several studies have shown that environmental benefits and open environmental reporting are related. For example, Gibson and O'Donovan (2007) looked at how Australian companies that had won environmental awards changed how they told the public about the environment. The poll found that businesses that had won awards gave more information about their environmental practices than those that had not.

Kolk and Perego (2010) did a second study within the Dow Jones Sustainability Index (DJSI) to examine how environmental prizes affect how much information is shared about the environment. The study's results showed that companies that got a high score on the DJSI, a well-known measure of sustainability, were much more open about their environmental policies and procedures than companies that did not get a high score.

Most empirical studies show that environmental rewards and the level of disclosure are linked well (Onkila & Sarna, 2022). Even though this connection might not always be the same and might depend on other factors, this is what most of this study points to. The effect of environmental awards on the quality of exposure can be changed in several ways, such as by the type of business, size, and cultural standards. Future studies should focus on the things that weaken this link between environmental awards and quality of disclosure in order to get a better idea of how complicated the relationship between the two is.

2.2. Gaps in the Previous Studies

Even though the study on the current topic has made significant contributions, many gaps still need to be filled. Something needs to be done about this. To start, there needs to be more research that is both broad and specific to the area. Since most of the research done up to this point has focused on specific areas or sectors, it is hard to generalize the results of studies (Onkila & Sarna, 2022). To fully understand the many factors at play, one needs to widen the scope of the study to include a broader range of countries, businesses, and workplace settings. This could be done by making the research's reach bigger.

Another critical gap in the body of knowledge is that mediating and controlling interactions should be considered more. Depending on several factors, environmental awards and firm performance may have less of an effect on how well environmental information is shared. Some of these are the type of business, the size of the business, the laws, and the pressure from partners. For a better understanding of the underlying processes and events that affect the link, more studies need to be done on these parts and how they affect each other.

2.3. Theoretical Framework

Several theories shed light on the link between environmental award, financial performance, and environmental disclosure quality. Some examples of these philosophical models are the legitimacy, shareholder, and institutional theories.

2.3.1. The Legitimacy Theory

The legitimacy theory states that groups must participate in environmental disclosure if they want to be seen as legitimate by society and live up to the standards that have been set for them. Customers tend to look up to companies that have won environmental prizes because they see them as companies that care about the environment (B Solikhah et al., 2020). Because of this acknowledgment, investors, customers, and government bodies are more likely to ask businesses about their environmental success.

2.3.2. The Stakeholder Theory

The stakeholder theory states that many different people who have a stake in how a company works may be able to influence its decisions. Investors, buyers, workers, and communities depend on a company's environmental impact and sustainability practices, and they depend on the company to provide honest and accurate information (Freeman et al., 2021).

2.3.3. The Institutional Theory

Institutional theory says that cultural norms and past events influence how groups behave. Organizations must follow the rules, customs, and ideals of the institutional settings in which they work to be successful. Both environmental awards and firm performance are ways to determine whether a company is following the rules and standards for environmental stewardship set by the organization (Risi et al., 2023).

His research design in compliance with the existing predicted framework was a crucial phase. From 2016 to 2020, the following research project looked into the relationship between environmental awards, financial performance, and environmental disclosure quality in non-financial companies listed on the Pakistan Stock Exchange. The study method includes a grading system to measure environmental disclosure quality and data analysis using the regression analysis on STATA-17 software.

3.1. Model Specification

This This study examines the impact of environmental award and financial on environmental disclosure quality. The present study was carried out with the help of four variables: Environmental disclosure quality (EDQ), Environmental award (EA), Financial Performance, Return on assets (ROA), Profit margin (PM), Return on equity (ROE), Firm Size (FS) and Firms age (FA). All the Variables are consistent with prior studies (Cormier et al., 2005; Solikhah & Maulina, 2021). The study employs the econometric method and multiple regression model (OLS) to formulate a regression model.

Research Model.

Econometrics model used,

Hypothesis 1

EDQi,t = β_∅ + β₁(EA)i,t + β₂(FA)i,t + β₃(FS)i,t + µ_t

Hypothesis 2

EDQi,t = β_∅ + β₁(ROA)i,t + β₂(PM )i,t + β₃(ROE)i,t + β₄(FA)i,t + β₅(FS)i,t + µ_t

Combined Model:

EDQi,t = β_∅ + β₁(ROA)i,t + β₂(PM )i,t + β₃(ROE)i,t + β₄(EA)i,t + β₅(FA)i,t + β₆(FS)i,t + µ_t

While:

EDQ = Environmental Disclosure Quality

EA = Environmental Award

ROA = Return on assets

PM = Profit Margin

ROE = Return on equity

FA = Firm Age

FS = Firm Size

β _∅ = Constant

β ₁, β₂, β₃, β₄, β₅ = Slop of coefficients

µt = Error term

3.2. Measurement of Environmental Disclosure Quality

Environmental disclosure quality is the dependent variable in this study, and a proxy is used to quantify it: compliance with laws, pollution prevention, environmental management, and sustainable development, consistent with existing studies (Solikhah & Maulina, 2021). We used a score of one to three. Three for an item explicitly described and discussed in monetary or quantitative terms, two when an item is explicitly discussed, and one for an item discussed in general (Cormier et al., 2005). After calculating the total score in four proxies, a percentage of the total score obtained is calculated, and a higher score indicates a significant level of transparency and data disclosure. Alfalih, Abdulaziz. (2022).

3.3. Measurement of Environmental Disclosure Quality

Saringat (2019) argues that recognition in the form of an award motivates organizations to improve their environmental performance therefore impact of environmental award on the EDQ will also be assessed. Environmental awards positively affect the quality of environmental disclosure (Solikhah & Maulina, 2021); therefore, the environmental award is used as an independent variable in this study. In order to assess whether a company has received an environmental reporting award from any of the recognized institutions like ICAP, PSX, ACCA-WWF, or any other accredited institute as mentioned in the annual report is considered for this purpose, in the relevant year, any environmental award is awarded to the company, we allocated one otherwise 0 is given.

3.4. Measurement of Financial Performance

In this research, we used return on assets, equity, and profit margin to measure financial performance, consistent with a previous study conducted by Solikhah and Maulina (2021). Additionally, return on equity, return on capital, net profit margin, dividend per share, and earnings per share are used in India to gauge a company's success (Sarumpaet, 2006). This information is taken from the companies' annual reports.

3.5. Control Variables and its Measurements

Prior literature finds that the quality of environmental disclosure improves with firm size (Deegan & Gordon, 1996; Bewtey & Li, 2000). We used the natural log of total sales (LnSALES) to measure the size of the firm being used as a control variable (Cormier et al., 2005).

According to the resource-based approach, older businesses are thought to have much more resources than younger firms, which will impact the organization's performance. For this reason, firm age is utilized as a control variable based on the notion that businesses accumulate resources through time (e.g., Autio et al., 2000; Akben-Selcuk, E., 2016).

3.6. Population and Sampling

This study includes all non-financial companies listed on the Pakistan Stock Exchange and active between 2016 and 2020. The purpose of taking the data until 2020 is to compare pre-COVID data. During COVID, the majority of listed companies suffered financial setbacks, so it is believed that data from 2020 onward doesn’t give the true financial performance of the listed companies. Therefore, 2016–2020 data was taken.

In Table 1, we analyzed the environmental disclosure quality scores sector-wise. During the analysis, we found that in the Compliance with Laws category, the majority of the sector performed above 90%, the Automobile Assembler sector was highest with 97% scores, and the Glass and Ceramics sector was the lowest with a score of 68%. Likewise, in terms of Pollution Prevention disclosure, the highest scoring sectors are the Papers and Board manufacturing sector, the Cables and Electrical Goods sector, and the Oil and Gas exploration sectors with an equal score of 88%, and the lowest performing sector is 50% scored by Glass and Ceramics sector.

In terms of Environmental Management disclosure, the lowest-performing sectors include the Glass and Ceramics sector and the Tobacco sector, with 53% scores, and the highest-performing sector was the Oil and Gas exploration sector, with 92% scores. In terms of Sustainability Development disclosure, Tobacco was the lowest-performing sector, with 42% scores, and the Oil and Gas sector and paper and Board sectors topped with 77% numbers.

Table 1

*Sectorial Analysis of Environmental Disclosure Quality*
Sr No	Industries	Compliance with Laws	Pollution Prevention	Environmental management	Sustainable Development
1	Automobile assembler	97%	83%	90%	68%
2	Automobile parts & accessories	91%	6%	80%	75%
3	Cable & electrical goods	92%	88%	88%	79%
4	Cement	86%	68%	66%	57%
5	Chemical	86%	70%	75%	57%
6	Engineering	92%	84%	83%	70%
7	Fertilizer	90%	85%	81%	74%
8	Food & personal care products	80%	61%	60%	50%
9	Glass & ceramics	68%	50%	53%	47%
10	Leather & tanneries	93%	84%	85%	61%
11	Oil & gas exploration companies	95%	88%	92%	77%
12	Oil & gas marketing companies	93%	79%	78%	62%
13	Paper & board	93%	88%	85%	77%
14	Pharmaceuticals	89%	82%	79%	73%
15	Power generation & distribution	79%	59%	60%	46%
16	Refinery	71%	56%	62%	58%
17	Sugar & allied industries	92%	81%	85%	65%
18	Textile composite	84%	71%	69%	60%
19	Textile spinning	86%	73%	72%	60%
20	Tobacco	93%	84%	53%	42%
21	Woolen	93%	87%	87%	47%

4.1. Descriptive Statistics

Table 2 shows the descriptive analysis of independent and control variables. These variables show high standard deviation, meaning that the cross-section data has great veracity. For example, the profit margin variable shows that some companies are in losses while many other companies show huge profits.

Table 2

*Descriptive Statistics*
Variable	Observations	Mean	Std. Dev.	Min	Max
EDQ	1396	75.20323	22.2594	0	100
Environmental Award-EA	1412	.3895184	.4878138	0	1
ROA	1415	2.332742	14.05884	-268.67	67.96
ROE	1415	15.46064	180.6189	-2923.47	4341.2
Profit Margin	1415	-103.0877	3143.24	-117008.8	1446.57
Firm Size	1415	9.619187	.9179547	4.6	12.46
Firm Age	1415	38.88339	15.78197	6	107

4.2. Multicollinearity Test

The study used pairwise correlation (Table 3) to investigate any potential multicollinearity among the research variables, and the results are recorded. The coefficient of correlation demonstrates that the problem of multicollinearity is not present. The coefficient value falls below the 0.50 criterion. Additionally, we carried out unique VIF analyses, as shown in Table 3, for every incidence. According to what we discovered, none of the readings in any of them exceeded the threshold of 5. No matter what the circumstance, this was the case (Shan, 2013). Hence, there is no multicollinearity among the variables.

Table 3

*Pairwise Correlation*
	EA	ROA	ROE	Profit Margin	Firm Size	Firm Age
Environmental Award-EA	1
ROA	0.0328	1
ROE	0.0172	-0.0071	1
Profit Margin	-0.0294	0.0111	0.0024	1
Firm Size	-0.0569	0.1059	-0.0362	0.0105	1
Firm Age	0.0919	-0.1308	0.0690	0.0200	-0.5287	1

Table 4

*Variance Inflation Factor (VIF)*
Variables	VIF
Environmental Award-EA	1.01
ROA	1.02
ROE	1.00
Profit Margin	1.00
Firm Size	1.39
Firm Age	1.41

4.3. Shapiro-Wilk Test for Normality

The Shapiro-Wilk test checks if a continuous variable follows a normal distribution. The null hypothesis - H0, states that the variable is normally distributed, and the alternative hypothesis, H1, states that the variable is NOT normally distributed. So, after running this test:

Table 5

*Shapiro-Wilk Test Results*
Variable	Observations	W	V	Z	Prob > Z
EDQ	1396	0.97685	19.790	7.491	0.0000
Environmental Award-EA	1412	0.99936	0.556	-1.475	0.92994
ROA	1415	0.65313	300.182	14.323	0.0000
ROE	1415	0.17609	713.011	16.495	0.0000
Profit Margin	1415	0.01525	825.201	16.943	0.0000
Firm Size	1415	0.97812	18.938	7.385	0.0000
Firm Age	1415	0.94805	44.960	9.556	0.0000

The test results in Table 5 depict that all variables are normally distributed as the p values are less than 0.05; therefore, we accept the null hypothesis and conclude that the data is usually distributed except for the variable Environmental Award, which has a value of 0.92994, which is greater than 0.05. This is because we used the absolute values for disclosure availability and non-availability, so the normal distribution of the variable's data was not expected.

4.4. The Breusch-Pagan Test for Homoscedasticity

The Breusch-Pagan test is performed to test the presence or nonexistence of Homoscedasticity. The Null Hypothesis H0 is the presence of Homoscedasticity.

The results of the test are as follows,

Variables: fitted values of environment disclosure quality.

chi2(1) = 23.42

Prob > chi2 = 0.0000

As the test result's p-value is less than 0.05, we reject the null hypothesis regarding Homoscedasticity and conclude that no Homoscedasticity exists in the data.

4.5. Regression Analysis and Results

Hypothesis 1

The Effect of Environmental Award on the Environmental Disclosure Quality

We must compare the p-values obtained from the regression tests with the decided significance level (alpha) of 0.05 to establish whether the hypothesis is accepted at the 0.05 significance level. We would reject the null hypothesis if the p-value were less than 0.05 since it would show a substantial correlation between winning environmental awards and the caliber of environmental disclosure quality.

Regression analysis has produced the following results:

Table 6

*Regression Results of the Effects of Environmental Award on the Environmental Disclosure Quality*
Variables		Co-efficient	T	P > ⎮t⎮
Environmental Award		17.27861	15.53	0.000
Firm Size		-0.1663319	-2.82	0.005
Firm Age		0.01869	0.59	0.555
R-Squared	0.1585
Adjusted R-Square	0.1567
F-value	88.41
Sig.	0.0000

Given the p-values above, the following inferences are drawn; we would reject the null hypothesis because their p-values are less than 0.05. As a result, we discovered a strong positive correlation between winning environmental awards and the quality of environmental disclosure. R Square shows that the explanatory variables explain 15.85% variation.

This study's results are also consistent with the previous studies (Badingatus et al., 2021) and Anas et al. (2015) that won the award for the quality of environmental disclosure.

The explanatory variables explain a 15.85% variation.

Hypothesis 2

Financial Performance and Environmental Disclosure Quality

Table 7

*Regression Results for Financial Performance and Environmental Disclosure Quality*
Variables		Co-efficient	T	P > ⎮t⎮
Return on Assets (ROA)		0.113891	1.18	0.240
Return on Equity (ROE)		-0.0020067	-0.59	0.558
Profit Margin (PM)		-0.0001022	-0.55	0.585
Firm Size		-0.1772399	-0.275	0.006
Firm Age		0.0640761	1.85	0.0064
R-Squared	0.0162
Adjusted R-Square	0.0127
Sig.	0.0000

Table 7 depicts the relationship between the dependent variable (Environmental disclosure) employed in this study and the independent variables (ROA, ROE, and profit margin) for the second model. Additionally, Table 8 demonstrates that there is no significant correlation between financial performance and environmental disclosure quality, which is consistent with the previous study (Badingatus et al., 2021); however, many previous studies have suggested contrary to the current study findings Nasir et al. (2014); Lu and Abeysekera (2014) which finds out that financial performance impacts a company’s quality of environmental disclosure. Our investigation results were also inconsistent with previous research (Rostami Suhadak et al., Suhadak et al., Cahyani Putri, 2019; Alsahlawi et al., 2021).

Given the p-values above, the following inferences are drawn: We would accept the null hypothesis because their p-values of ROA, ROE, and Profit Margin are more than 0.05. As a result, we discover a weak/no correlation between financial performance and environmental disclosure quality.

Regression results indicate a correlation between the number of environmental awards garnered by non-financial enterprises and their dedication to disclosing environmental information. As more incentives are offered, more effort is put into improving environmental disclosure quality.

The study finds that businesses are least likely to focus and invest in initiatives that reduce their environmental impact and promote sustainable business practices (Xing et al., 2021). The regression model has very little explanatory power, as indicated by the Adjusted R Square value of 0.1567. This demonstrates that while there is a correlation between environmental recognition and cleaner operations, the number of accolades alone is not a reliable predictor of a company's environmental commitment. Other factors are likely at play that impact pollution prevention strategies employed by non-financial businesses. The table detailing different types of environmental disclosure reveals that most companies (71.42 percent) provide information on their compliance with environmental regulations. This conclusion suggests that due to regulatory requirements and stakeholder expectations, firms are more open about their compliance with environmental laws and regulations. The table shows that while disclosure rates are high for compliance and pollution control, they are lower for sustainable development (80.95%).

However, environmental awards need to be more effective in transferring knowledge about the firms’ strategy regarding environmental activities. In addition to demonstrating the need for reporting compliance, the results provide avenues for companies to further their sustainable development initiatives. Researchers found that different-sized companies disclosed different amounts of environmental information, demonstrating the need for sector-specific approaches to sustainability promotion.

These findings suggest that companies scoring higher on firm performance are least likely to score higher on environmental disclosure. That is, there is no correlation between firm performance and environmental transparency.

One of the significant limitations of this study is the potential for reverse causality. Although the statistics have not yet shown a direct link, they suggest that companies that win environmental awards are more likely to have high-quality environmental disclosure. In addition to increasing the likelihood of awards, a company's commitment to environmental preservation may not impact the company's bottom line. Future studies may employ longitudinal or experimental methods to show causation and provide a more in-depth understanding of the connection between these elements. The fact that the study focuses solely on listed non-financial companies data from 2016 − 202 suggests it may be subject to selection bias. It is also emphasized that this study does not account for macroeconomic variables like the unemployment rate, the exchange rate, and Government spending.

Furthermore, some aspects of corporate sustainability should have been noticed due to the study's focus on financial performance assessments (ROA, ROE, and PM). The selected financial measures may need to accurately reflect the various sustainable practices that businesses may participate in beyond financial considerations. Total shareholder return, social responsibility indices, and sustainability rankings are other financial and non-financial factors that may be included in future research to comprehensively examine the correlation between firm performance and environmental disclosure quality.

We can derive several vital conclusions and implications from this study through thorough data analysis, statistical tests, and an exhaustive literature assessment. According to our study, the quality of environmental disclosure has a substantial positive link with the recognition of environmental awards. Businesses that won renowned environmental awards were likelier to place a high value on accountability and openness when disclosing their environmental actions and impacts. This result supports the idea that external validation and recognition might incentivize businesses to improve their environmental disclosure quality, potentially due to reputational issues and a desire to keep up their industry-leading status. Furthermore, our study found no link between a company's firm performance and its environmental disclosure quality caliber. This finding implies that financially successful companies may not emphasize environmental disclosure quality as it does not improve their stakeholder trust, reputation, and overall company image, which might translate into competitive benefits, and this can be a challenge for regulators to create an environment by forming policies under which corporates must incorporate environmental data into financial data so stakeholders can make their decisions based on the quality of environmental data given in the financial reports.

Funding

No funding has been received to prepare this research paper.

Data Availability Statement

The data supporting this study's findings are available in Zenodo at 10.5281/zenodo. 11232356, https://doi.org/10.5281/zenodo.11232357, and https://zenodo.org/records/35419. These data were derived from the following public domain resources: https://dps.psx.com.pk/financial-reports.

Conflict of Interest

The authors have no conflict of interest to declare.

Authors Contribution

Each author has made a substantial contribution to the research.

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Impact of Environmental Award & Financial Performance on Environmental Disclosure Quality: A Case Study of Listed Companies in Pakistan

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Abstract

1. Introduction

2. Literature review

2.1. Empirical evidence between environmental awards, firm performance, and environmental disclosure quality

2.2. Gaps in the Previous Studies

2.3. Theoretical Framework

2.3.1. The Legitimacy Theory

2.3.2. The Stakeholder Theory

2.3.3. The Institutional Theory

3. Research Methodology

3.1. Model Specification

3.2. Measurement of Environmental Disclosure Quality

3.3. Measurement of Environmental Disclosure Quality

3.4. Measurement of Financial Performance

3.5. Control Variables and its Measurements

3.6. Population and Sampling

4. ANALYSIS AND FINDINGS

4.1. Descriptive Statistics

4.2. Multicollinearity Test

4.3. Shapiro-Wilk Test for Normality

4.4. The Breusch-Pagan Test for Homoscedasticity

4.5. Regression Analysis and Results

5. Research Methodology

6. Limitations and Future Research

7. Conclusion

Declarations

References

Additional Declarations

Supplementary Files

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