The effect of greenhouse gas emissions on financial performance of listed manufacturing firms in Indonesia

Abstract

This study aims to understand the effect of greenhouse gas (GHG) emissions, environmental performance and social performance on the financial performance of listed manufacturing firms in Indonesia. Six multiple regression analyses with cross-sectional data were utilised to examine the effects. The sample comprised 102 listed manufacturing firms in Indonesia in 2011. Sampling was based on the availability of firms’ financial reports in 2010 and 2011,annual reports in 2011 and the feedback of face-to-face interview about the types and amounts of fossil fuels, as well as the amount of electricity, consumed by the firms in 2011. Six different measurements of financial performance as dependent variables were utilised to capture the different responses of stakeholders to firm performance. The six different measurements of firm financial performance were return on assets (ROA),return on equity (ROE),return on investment (ROI),return on investment capital (ROIC),return on sales (ROS) and Tobin’s q. The independent variables of interest in this research were GHG emissions (measured in CO2e intensity),firm environmental performance (measured by the dummy variable of PROPER rating) and firm social performance. To measure firm social performance, scores were developed for social performance reported. This was done by following the Global Reporting Initiative, through content analysis from the disclosed information available in the 2011 annual reports. Jones’s (1995) Instrumental Stakeholder Theory and Porter’s (1980) Theory of Competitive Advantage were used to explain the relationship between GHG emissions and firm financial performance, between firm environmental performance and firm financial performance, and between firm social performance and firm financial performance. Surprisingly, the results showed that CO2e intensity has a positive significant effect on ROA, ROE,ROI,ROIC,ROS and Tobin’s q. The positive significant effect of CO2e intensity on firm financial performance means that the increase in CO2e intensity will increase firm financial performance. The PROPER rating does not have a significant effect on ROA,ROE,ROI,ROIC, ROS and Tobin’s q. Social performance score has a positive significant effect on ROA,ROI and ROS, but does not have a significant effect on ROE,ROIC and Tobin’s q. This finding of the positive significant effect of CO2e intensity on firm financial performance contrasts with the findings of previous studies carried out in several developed countries. The positive significant effect found in this study has been explained with reference to Indonesia’s particular circumstances as a developing country.

Date of Award	2015
Original language	English
Supervisor	Milind SATHYE (Supervisor) & Suneeta Sathye (Supervisor)