BACKGROUND OF THE STUDY
Environmental accounting concept and practice has evolved from
sustainability reports and the broader concept of corporate social
responsibility. In this age when globalization and the growth of
multinational enterprises have been blamed for environmental neglect and
depletion of natural resources, it is but relevant to highlight the
activities companies engage in to preserve and repair its natural
environment. Senge (2008) calls for a 'necessary revolution'
in the way businesses are conducted--a new business rationale of
sustainability. Porter (2008), updates his views on competitive
advantage with green solutions on resource productivity to societal
Sustainability reporting, particularly, environmental accounting
has been advocated by Japanese companies and the government since 1999.
This is in response to the absence of generally accepted standards on
environmental reporting and a move to further advance the Global
Reporting Initiative of 1997.
Globally, companies in the computers & electronics and
automotive manufacturing have been the leaders in sustainability
reporting next to pharmaceutical companies. The highest growth in
reporting has taken place in Japan, France and the U.K. followed by
Germany. Standardization has been observed to increase quantity and
quality of reporting particularly in Japan due to the government's
regulation and encouragement (Kolk 2003).
In the Philippines, there is no set standard that provides for the
consistency and comparability of environmental disclosures within firms
because it is left to the discretion of management (Aquino 2009). It is
therefore, important to study the environmental accounting and reporting
practices of Japan because it may influence the same practices in its
subsidiaries in developing countries like the Philippines.
STATEMENT OF THE PROBLEM
Is it beneficial to incur environmental cost?
Based on the experience of Japanese companies, particularly Toyota
Motors Corporation, aside from rooting on culture, and compliance with
regulations, are environmental investments and expenses beneficial?
Taking the lead role in advocating environmental accounting should also
merit its benefits to convince other countries and companies to do the
This study has the following objectives to prove the
cost-beneficial view of environmental accounting:
To describe Toyota's environmental accounting report within
the context of Japan's prescribed guidelines;
To relate the environmental costs and investments to the
firm's financial performance;
From an Economic Perspective
This paper uses the Kaldor-Hick Efficiency basis of cost-benefit
analysis. The KaldorHicks efficiency states that an outcome is more
efficient if those that are made better off could in theory compensate
those that are made worse off, so that a Pareto improving outcome
results. This criterion is widely applied in welfare economics and
managerial economics and forms the underlying rationale for cost benefit
analysis because it provides a more practical standard justifying costs
with net social benefits. The theoretical foundations of the
cost-benefit theory could be traced back in welfare economics in the
19th century France (Nas 1996).
The OECD has espoused cost-benefit analysis in their public
advocacies on environment policy, transportation planning, and health
care. Particularly for the environment, the OECD has highlighted special
challenges on environmental problems and environmental policy that pose
for cost-benefit analysis. It is in this light that the OECD suggests
cost benefit appraisals to take account of recent concern about
sustainable development (OECD 2006).
In cost-benefit analysis, an alternative, such as engaging in
environmental activities is evaluated by comparing the total costs, in
this case environmental expenses and investments, with the total
benefits, cost savings, other income from recyclable materials and
avoidable clean up and litigation costs. The typical decision criterion
would be to accept the alternative where benefits exceed the costs, this
in effect, is the application of the Kaldor-Hicks Efficiency theory.
The environmental cost presented as the major element in
environmental accounting enables correlation of each item with the
environmental conservation effects and economical effects associated
with environmental measures. These environmental costs are equated with
the effects that were achieved by activities for promoting environmental
conservation efficiently and effectively while maintaining the friendly
relationship with society in order to have sustainable development
(Japan Environment Agency 2000).
In a larger context, environmental costs deemed as independent
variables are influenced by intervening variables such as Japanese
environmental laws and guidelines and the culture of environmental
conservation. The benefits are the dependent variables which are
measureable results in the form of cost savings, other income from sale
of recyclable materials, and physical benefits. Other eco-marketing and
brand preferences, however, are difficult to include in the measurement.
From a Sociological Perspective
Among advocates of the network theory was Podolny & Page
(1998). They defined a network form of organization as "any
collection of actors that pursue repeated, enduring exchange relations
with one another and, at the same time, lack a legitimate organizational
authority to arbitrate and resolve disputes that may arise during the
exchange". Environmental accounting although deemed voluntary in
Japan, is somehow a common practice guided by the government's
initiatives. TMC as a multinational company has subsidiaries in various
developing countries where environmental standards may not be
established yet, like the Philippines. Hence, any disparity in
environmental reporting is not covered by any legal regime, thus
preserving the voluntary initiatives and relying heavily on
organizational culture of TMC to advance the practice in its
In earlier sociology, Wellman established the patterns of social
relationships amongst members. He explored the deep structures and
network patterns of complex social systems that constrain the actions of
'actors'. Thus, the focus is "not on voluntaristic
actors, but on structural constraints" (Wellman 1983 in Ritzer
1988). Since TMC is reporting a consolidated financial report and
sustainability report, it's multinational structure facilitates the
practice of sustainability, particularly environmental reporting.
Actors, like TMC Japan or TMC Philippines (individual or
collective) may have differential access to valued resources (wealth,
power, information). The result is that structured systems tend to be
stratified, with some components dependent on others (Ritzman 1988).
According to Molm (2001), when an actor has possessions or
behavioral capabilities that are valued by other actors, they are
resources in that actor's relations with those others. Social
exchange resources include not only tangible goods and services, but
capacities to provide socially valued outcomes such as approval or
status (Molm 2001).
In the case of TMC's relationship with its subsidiaries,
worldwide, the relationship is clearly a network direct exchange.
Exchange networks are sets of direct exchange relations among actors,
either individual or collective, that are connected to one another.
Connected relations are linked by a focal actor (such as TMC Japan), and
exchange in one relations affects the frequency or value of exchange in
the other. Connections are positive to the extent that exchange in one
relation increases exchange in the other (Molm 2001). Environmental
management systems are well integrated in Japanese headquarters
operations and hence, expected to be observed by subsidiaries worldwide
regardless of differences in values system.
Parsons' Normative Institutional Theory
Japanese environmental accounting practices can be explained by
Parsons' institutional approach to organizations. He argues that
"value systems of organizations are legitimized by its connections
to the main institutional patterns in different functional
contexts" (Scott 2001). As such, the value of environmental
management can be seen as in compliance with Japanese norms of caring
for the environment. He applies his general cultural-institutional
arguments to organizations primarily by examining the relation between
an organization and its environment (business and natural environment).
Since environmental management systems are institutionalized in
Japanese society and production systems, these normative structures
legitimize the patterns of operations of MNCs like Toyota Motors
Corporation. However, different values systems may exist between TMC
Japan and their subsidiaries where they have extended enterprise
Organizations operating in different functional sectors are
legitimated by different values, exhibit different adaptive patterns,
and are governed by different codes and normative patterns. Moreover,
value systems are stratified within a society such that organizations
serving more highly esteemed values are thought to be more legitimate
and are expected to receive a disproportionate share of societal
resources (Parsons 1953 in Scott 2001).
Parsons adds that an organization is a subsystem of a wider social
system which is the source of the meaning, legitimization, or
higher-level support which makes the implementation of the
organization's goals possible (Parsons 1956 in Scott 2001).
Likewise, the cultural-cognitive pillar of institutional theory
could also be related to TMC and its subsidiaries. For
cultural-cognitive theorists, compliance occurs in many circumstances
because other type of behavior are inconceivable; routines are followed
because they are taken for granted as "the way we do these
things", (Scott 2001).
As for TMC's early compliance with environmental accounting
guidelines, Scott (2001) explains this through attributes in structure
and performance. He states that size is important and that the larger
organizations are more prone to early adoption of attributes. Larger
organizations tend to be more resource rich; larger organizations are
more differentiated and hence more sensitive to environmental changes
One major criticism on corporate social responsibility is that it
distributes the final outputs of business operations following Fiduciary
Capitalism. To test whether the final outputs or profitability is
impaired as a result of spending for environmental costs, the following
alternative hypotheses are formulated:
[H.sub.a1]: The economic effect has significant positive
correlation with environmental costs
[H.sub.a2]: Profitability has significant correlation with
Profitability could be measured in terms of absolute net income and
other pertinent ratios like return on sales, return on assets, dividends
per share, and earnings per share. The relationship of environmental
costs with business activity measured in terms of revenues shall be
established. Is it a fixed portion of revenues or is there a direct
relationship? If a company has more production activity, does it follow
that it has more environmental costs?
SIGNIFICANCE OF THE STUDY
While most Japanese companies abide by the guidelines set by the
Department of Environment, cost benefit studies are wanting to measure
the significance of environmental costs on the economic and
environmental effects. This justification can serve as a basis to
encourage other companies or countries where environmental accounting
has no set standard or guidelines yet.
SCOPE AND LIMITATIONS
This case study covers the sustainability and annual reports of
Toyota Motors Corporation for the fiscal years ending 1998 to 2009. For
comparability and consistency purposes due to available data, the
starting period of this analysis is from fiscal years ending 1998 to
2008. The reason for such is that TMC's 2009 sustainability report
presents environmental accounting for the fiscal year ending 2008. The
report on environmental accounting for the fiscal year ending 2009 will
only be published in 2010 sustainability report. Considering that this
paper shall be executed in a two month period, a case study is more
viable than a full blown cross-company industry or cross-country study
which is the ultimate objective of the researcher.
For data processing, this study is designed to be a qualitative
research. While there will be attempts to establish correlation, other
significant influences and factors shall be discussed to have a
multifaceted view of environmental accounting in a Japanese context.
While Toyota Motors Corporation cannot generalize the findings for
the Japanese automotive industry environmental accounting practices,
this study may assume that the findings are significant indicators of
performance which could be applicable to any manufacturing company in a
similar environment--like electronics and related industries.
Corporate Social Responsibility (CSR) is the bigger theory behind
sustainability reporting. From CSR, corporate citizenship (CC) is a more
specific term referring to corporate social performance, which is a
detailed construct of CSR. Corporate citizenship then refers to social
and environmental performance of companies. In relation to this study,
sustainability reporting is assumed to emanate from corporate
REVIEW OF RELATED LITERATURE
Since the 1950s corporate social responsibility (CSR) has been a
research construct that is subjected to various definitions and
perspectives. In order to relate environmental accounting and the
objectives of this paper, a brief discussion of relevant CSR theories
and corresponding prominent research themes leading to sustainability
reporting shall be narrated. The concept of sustainability, however, has
three dimensions: economic, social and environmental performance. Hence,
environmental accounting is the ultimate direction of this section with
emphasis on international perspectives and the Japanese initiative.
Toyota Motor Corporation's (TMC) sustainability reporting is
described towards the end.
CSR as a Construct of Theories
Howard Bowen's (1953) definition of social responsibility as
"obligations of businessmen to pursue those policies, to make those
decisions, or to follow those lines of action which are desirable in
terms of the objectives and values of our society", has brought
about two relevant CSR theories to this study: corporate social
performance (CSP) and the stakeholder theory. Both have attained
widespread acceptance in social and business management research.
Over several decades now, the role of businesses as corporate
citizens has evolved due to changing societal expectations. Multiple
stakeholders are now demanding increasing governance of companies on
multi-faceted aspects of corporate performance. Wood (1991) views CSP as
altering corporate behavior to produce less harm and more beneficial
outcomes for society and their people (Wood 1991). In the stakeholder
theory, on the other hand, a company ought to be managed for the benefit
of its stakeholders: its customers, suppliers, owners, employees, and
local communities, and to maintain the survival of the firm (Evan and
In order to combine the two CSR theories, and as seen most relevant
to the objectives of this paper, George Steiner's (1971) CSR
definition shall be referred to because the subject company, Toyota
Motors Corporation Japan, has grown so large yet responsible over its
profitable operations in various countries. Businesses, according to
Steiner (1971), are and must remain fundamentally an economic
institution with responsibilities to help society achieve its basic
goals and therefore, have social responsibilities. Steiner emphasizes
that the larger a company becomes, the greater are its responsibilities.
Companies, however, can assume some share of social responsibility at no
cost and often with a short-run as well as long-run profit (Steiner
Another relevant view on CSR is Archie Carroll's definition
that social responsibility encompasses the economic, legal, ethical, and
discretionary expectations that society has of organizations at a given
point in time (Carroll 1979). Specifically, discretionary expectations
highlight different values system of stakeholders such as concern for
employees, communities or the natural environment. In this age of global
warming, the environment is undoubtedly a very important consideration
for Japanese companies and most developed countries. Toyota Motors
Corporation Japan and the rest of the global automotive manufacturers
took part in the development of the global reporting initiative. In
coordination with the Japanese government, TMC participated in drafting
its Japan's guidelines for environmental reporting.
CSR and Firm Performance
Various researches have sought to examine the relationship between
corporate social performance and financial performance. However, poor
measures and weak theory construction are often mentioned as causes of
the variability in findings (Orlitzky 2008). In order to effectively
operationalize CSR, corporate financial performance (CFP) and corporate
citizenship (CC) were considered less ambiguous and hence related to
profitability. Orlitzky, Schmidt and Rynes (2003) supports that there is
a positive relationship between corporate citizenship and corporate
financial performance with causal mechanisms such as the improvement of
managerial knowledge and skills and enhance corporate reputation
(Logsdon and Wood 2002). Along the same line, Jones and Murrell (2001)
examined how a firm's public recognition for exemplary social
performance can serve as a positive signal of the firm's business
performance to shareholders. In addition, Orlitzsky (2008) cites the
following causal mechanisms that link CFP and CC: efficiency, increasing
competitors' costs, attracting more productive workforce, boosting
sales revenues, and reducing business risk.
More importantly, there are strong theoretical arguments for the
reverse causation of CFP and CC. The arguments about reverse causation
may generally be subdivided into two broad categories: the slack
resources view and the normative view.
Consistent with Steiner's earlier view on CSR, high levels of
CFP may provide the slack resources necessary for a company to engage in
corporate social responsibility and responsiveness; and the availability
of excess funds for voluntary social and environmental policies are up
to management discretion (Carroll 1979, McGuire et al 1988, Cyert and
March 1963; Ullmann 1985). In the foregoing, the intervening variables
on this reverse causation are innovation and firm size (Orlitzky 2008).
Evidence from the United States supports that slack resources view
and show that the largest number of publicly listed firms that did not
have environmental policy was the low financial performers; while high
financial performers did have higher incidences of environmental
policies as compared with the low financial performers (Stanwick and
Globalization Moves CSR Forward
Globalization is the process of intensification of cross-area and
cross-border social relations between actors from very distant
locations, and of growing transnational interdependence of economic and
social activities (Scherrer & Palazzo 2008).
In globalization discussions, the presence of multinational
companies (MNCs) and their emergent powers come into fore. MNCs have
become very powerful economic and social agents. The world's
biggest corporations have revenues that equal or even exceed the gross
domestic product of some developed states (Chandler and Mazlish 2005).
The power of MNC's is not just based on the enormous amount of
resources they control. It is enhanced by their mobility and their
capacity to shift resources to locations where they can be used most
profitably and to choose among suppliers, applying criteria of
efficiency. In effect, this gives MNCs the latitude to choose locations
and the legal systems under which they will operate (Roach 2005; Scherer
et al, 2006). With globalization, businesses become political actors
that have social responsibilities beyond their economic role, and mere
compliance with the law (Scherrer & Palazzo 2008).
In relation to developing countries where MNCs have production and
other operations, the former has little or no bargaining power lest the
latter choose other competing countries where the investment climate is
more attractive. One predominant CSR concern is that governments may
ignore corporate irresponsibility or refuse to enforce protective labor
or environmental standards in the law as an inducement to foreign
investment (Aman 2001; Williams & Aguillera 2008).
Therefore, from an actor centered perspective, a MNC may take the
initiative in moving forward CSR while riding the waves of globalization
for the benefit of developing countries. Another comparative approach is
the study of CSR within MNCs to determine whether there are differences
in practices not only between the home MNC and the subsidiaries but also
across the different subsidiaries worldwide (Allen 2006; Williams &
Sustainability Emerges from Global Initiatives
Non-financial reporting by companies is a relatively new concept in
publishing annual performance. The most significant is perhaps the
Global Reporting Initiative. Launched in 1997 by the Coalition for
Environmentally Responsible Economies, a U.S. non-governmental
organization, and the United Nations Environment Program, its objective
is to enhance the quality, rigor, and utility of sustainability
On the same year (1997), the United Nations Framework Convention on
Climate Change, on its third session adopted the Kyoto Protocol. The
agreement provides that 38 countries including developed and economies
in transition reduce their Green House gasses including carbon dioxide
emissions to a total of 5.2% below the 1990 level during the period 2008
to 2012 (Takao & Tatsuyoshi 2002).
GRI was supported by representatives from business, non-profit
advocacy groups, accounting bodies, investor organizations, trade
unions, and other concerned groups. These stakeholders have built a
consensus around a set of reporting guidelines with the aim of achieving
worldwide acceptance (Sustainability Reporting Guidelines 2002).
However, adoption of the guidelines for economic, environmental and
social dimensions of business activities, product and services were
The early success and swift progress of the GRI was attributed to
the following drivers: expanding globalization; the search for new forms
of global governance; emergence of sustainability frameworks; and the
development of modern accounting and reporting practices (Enderle 2004).
Sustainability reporting emanated from the Global Reporting
Initiative five years after. Although initially defined in terms of the
natural environment, it evolved into a more encompassing concept that
embraced the larger social and stakeholder environment, otherwise known
as the triple bottom line--economy, society and environment.
Sustainability reporting serves as a guideline for organizations to
disclose their sustainability performance regardless of size or type,
sector or geographic region. On the other hand, Senge (2008) argues that
the most important and encompasses all priorities is the environment. He
posits that there could be no healthy economy without a stable and
vibrant social order.
Representatives from Toyota, Ford, General Motors, BMW, Honda, and
Volkswagen, together with country industry associations, participated in
the working groups. As far as environmental reporting is concerned, the
performance indicators are on emissions, effluents and waste (GRI 2004).
This standardization of sustainability reporting by the GRI and with the
support of government regulation and incentive is seen to increase both
the quantity and quality of reporting (Kolk 2003).
In the period 1998 to 2001, the frequencies of sustainability
reporting were seen highest in the chemicals & pharmaceuticals,
computers & electronics, automobile, utilities and oil & gas
companies in the Fortune Global 250 companies; and with the U.K. and
Japan leading countries with significant growth percentages of reporting
Sustainability Reporting and Traditional Performance Evaluation
There are three pioneering studies on combining sustainability
reporting with traditional financial analysis. Chousa and Castro (2006)
translate the impacts of social and environmental activities into
accounting and financial terms. This allows the management of impacts
over business risks, profitability and value creation. In their proposed
integrated model for financial analysis and sustainability, they
attempted to equate social and environmental factors (renewable
materials, wastes, pollution, energy consumption, etc.) with measures of
business performance (usually sales) (Chousa & Castro 2006).
Similarly, a Greek study by Karatzoglou (2006) followed Chousa and
Castro's attempt by combining traditional accounting return ratios
and business sustainability. Using return on investment (ROI), return on
equity (ROE), residual income and return on capital employed (ROCE),
Karatzoglou proposed a few modifications on the accounting treatment to
allow for consideration of sustainability operating expenses.
Thirdly, Mook (2006) proposes the expanded value added statement by
integrating and reporting economic, social, and environmental
The measures established by Chousa and Castro (2006), Karatzoglou
(2006) and Mook (2006), however, are only viable if there is complete
information and can presumably be prepared from an internal company
perspective. Relying heavily on published sustainability and annual
financial reports may not facilitate the adoption of the proposed
integrated models. Most of the published information in sustainability
reports, like environmental costs and investments, have been processed
and cannot be traced anymore to income statement accounts. This makes
the earlier attempts to integrate sustainability reporting with
financial reporting difficult unless initiated by companies themselves.
The current practice is that sustainability reports are published
separately in form and substance from annual financial reports.
The main environmental concerns on financial accounting analysis
are the recognition, measurement and disclosure of environmentally
related economic impacts on business. Specifically, these may involve
environmentally induced expenses like fines and clean-up costs. Hence, a
reclassification of costs, expenses, and their related assets and
liabilities, pertinent to the environment is imminent. In 1995, the
International Accounting Standards Committee (IASC) illustrated the use
of an environmental asset if it yields a future economic benefit.
Environmental liabilities are future contingent costs for clean-up and
related lawsuits (Schaltegger and Burritt 2000).
While costs, expenses and capitalizing to assets have been clearly
delineated in financial accounting, it is not as easy as applied to
environmental costs and investments. In the end, companies end up
extracting environmental accounting reports from financial statements
instead of integrating it with conventional accounting system.
Environmental Accounting in Japan
The practice of environmental accounting in Japan has been in place
for over a decade now. Since 1998, the disclosures of environmental
information of publicly listed Japanese corporations have increased
steadily from 35 percent to majority practice as a result of the
government's initiative--the Environmental Reporting Guidelines
(2000) by the Ministry of Environment. While deemed voluntary, the
adoption and common practice has established the guidelines as a norm or
Published in May 2000 and revised in September 2002, the guidelines
can be summarized in the following three points: environmental
accounting system; environmental conservation cost; and environmental
conservation effects and economical effects (Kokubu & Nashioka
The Ministry of Environment (2002) describes environmental
accounting in the following quote:
The guideline (2000) describes environmental accounting as a system
that integrates financial performance and environmental performance
through correlating the environmental conservation effects and
economical effects associated with environmental measures. Kokubu &
Nashioka (2002) views environmental accounting according to the
guideline, as more likely restricted to the calculation of environmental
conservation cost but the range could be expanded into environmental
conservation as well as corporate management (Kokubu & Nashioka
(2002). Environmental costs are classified into six categories: (1)
business area costs; (2) upstream / downstream costs; (3) management
activity costs; (4) research and development costs; (5) social activity
costs; and (6) environmental damage costs.
Kokubu & Nashioka (2002) criticize the current practice and see
the comparability of these costs amongst companies as not so reliable
yet. Companies conforming to the guidelines are left with a lot of
discretion in recognizing and reporting environmental costs. However, a
comparison of environmental costs and financial figures such as sales is
probably helpful in seeing trends in companies' environmental
In a related study by Kokubu, Nashioka and Imai (2002) and Saka
(2002), the benefits of environmental accounting were detailed. In a
survey of 159 companies in the Tokyo stock exchange the general
consensus was environmental accounting is beneficial because it gave
management the understanding how much environmental costs incurred.
Secondly, management sees the improvement of corporate image while
enhancing consciousness within the company. Details of benefits for
internal management includes reduction of environmental burden,
reduction of environmental costs, development of environmentally
friendly products and the improvement of environmental decision making
(Saka 2002). These are all consistent with Orlitzky's (2006)
theorization of the benefits of environmental accounting.
Toyota' Sustainability Reporting and Environmental accounting
TMC's environmental philosophy is to reduce environmental
impact at all stages of vehicle development from production, use,
disposal and recycling; while undertaking environmental activities in
all business areas. TMC aims to establish environmental systems in all
regions and areas of operations and working with related parties in
Japan and overseas to implement a consolidated environmental management
system and promote environmental awareness on a global scale (TMC
Sustainability Report 2008).
TMC's three broad areas of sustainability are: sustainable
mobility, sustainable plant initiatives, and sustainable societal
Sustainable mobility focuses on TMC's core product--automobile
manufacturing and its issues related to the environment, safety and
traffic congestion through technical innovation. Toyota was the pioneer
in introducing hybrid automotive technology that makes the optimal use
of energy through gasoline and electricity. On a larger scale, issues on
energy and global warming and ultimately a low carbon society is aimed
at in this area of TMC's sustainability goals. Porter (2008) sees
environmental pollution as equated to inefficiency (incompletely and
ineffectively). These are evident in incomplete material utilization and
poor process controls, which result in unnecessary waster, defects, and
stored materials. Porter (2008) stresses that pollution reveals flaws in
the product design or production processes. TMC therefore, works on
hybrid technology to make the most efficient use of electricity, low
carbon emission, clean gasoline and diesel and development of high
performance batteries (Toyota 2009).
Sustainable plant initiatives look closer into TMC's
manufacturing and aims to fully utilize natural resources yet in harmony
with the natural world. The initiatives include: energy reduction,
energy conversion and local community involvement and ecological
preservation. Toyota's sustainable model plant (in Tsutsumi) shall
be replicated in all overseas plants, ultimately making all plants
sustainable (Toyota 2009).
Sustainable social contributions make use of the skills, expertise
and technologies that have been developed through business activities.
Practical projects supported herein are issues on global warming and
biodiversity (Toyota 2009).
Conceptually, Porter (2008) suggests that environmental improvement
can benefit resource productivity through process benefits like
materials savings, increase in process yields, better utilization of by
products, conversion of waster into valuable forms, low energy
consumption, reduced material storage and handling costs, savings from
safer workplace conditions and elimination of clean up costs. In
addition, the product benefits are higher quality, lower production
cost, more efficient use of resources, safer products, and lower cost of
disposal and higher resale value of products (Porter 2008).
Toyota's sustainability reporting principle involves solving
issues related to the environment, safety and traffic congestion through
technical innovation, and ultimately, sustainable mobility to society. A
pioneer in sustainability reporting, Toyota has participated in the
Global Reporting Initiative and in drafting the guidelines of the
Japanese framework for the Environment Agency. TMC's sustainability
reporting started in 1998 years ahead of the GRI and Japan's own
Toyota's Financial Situation
Toyota is primarily engaged in the design, manufacture, and sale of
sedans, minivans, compact cars, sport--utility vehicles, trucks and
related parts and accessories throughout the world. In addition, Toyota
provides financing vehicle and equipment leasing and certain other
financial services primarily to its dealers and their customers to
support the sales of vehicles and other products manufactured by Toyota.
The business segments of Toyota include automotive operations, financial
services operations and all other operations. Automotive operations is
Toyota's most significant business segment, accounting for 89% of
Toyota's total revenues before the elimination of intersegment
revenues and 95% of Toyota's total operating costs for
fiscal 2008 (Toyota, 2008).
The automotive market in the world is said to be highly competitive
and volatile. The demand for this product is affected by a number of
factors including social, political and general economic conditions;
introduction of new vehicles and technologies; and costs incurred by
customers to purchase and operate vehicles. These factors can cause
consumer demand to vary substantially from year to year in different
geographic markets and for different types of automobiles. Despite the
market's competitiveness, the annual report of TMC shows increasing
unit sales from 2006 to 2008, based on the total unit sales of its
products all over the world. But, based on the unit sales per geographic
segment, there was a decline in the Toyota unit sales in Japan, from
2,364,000 units in 2006 down to 2,188,000 units in 2008. Despite the
decline in the unit sales of Toyota's products in Japan,
Toyota's market share (including Daihatsu and Hino) including
min-vehicles, and Toyota and Lexus' market share excluding mini
vehicles, remained at a high level close to prior fiscal year reflecting
the sales efforts of domestic dealers (Toyota, 2008).
Toyota had net revenues for fiscal 2008 of [yen] 26,289.20 billion,
an increase of [yen] 2,341.20 billion, or 9.8% increase compared to
prior year. Based on the 2008 annual report of Toyota Motors
Corporation, it seems that net revenues increase through the years. This
increase principally reflects the impact of increased vehicle unit
sales, increased financing operations, increased part sales and the
favorable impact of fluctuations in foreign currency translation rates
during fiscal 2008. Toyota's net revenues include net revenues from
sales of product that increased by 9.5% in 2008, and net revenues from
financing operations that increased by 14.9% in 2008 (Toyota, 2008).
Operating costs and expenses of TMC increased by [yen] 2,309.50
billion, or 10.6%, to [yen] 24,018.90 billion during fiscal 2008
compared with the prior year. The increase resulted primarily from the
impact on costs of products attributed to vehicle unit sales growth and
changes in sales mix, impact of fluctuations in foreign currency
translation rates, increase in research and development expenses,
increased expenses in expanding business operations and increased costs
corresponding to the increase in part sales. These increases were
partially offset by the net impact of cost reduction efforts, responding
to rise in prices of production materials and parts in fiscal 2008
Continued cost reduction efforts reduced operating costs and
expenses in fiscal 2008 by approximately [yen] 120 billion, partially
offset by increases in the prices of steel, precious metals, non-ferrous
alloys including aluminum, plastic parts and other production materials
and parts, over what would have otherwise been incurred. These cost
reduction efforts relate to ongoing value engineering and value analysis
activities, the use of common parts that result in a reduction of part
types and other manufacturing initiatives designed to reduce the costs
of vehicle production (Toyota, 2008).
Cost of financing operations increased by [yen] 195.90 billion, or
22.5% to [yen] 1,068 billion during fiscal 2008 compared with the prior
year. The increase resulted primarily from the impact of increased
interest expense caused primarily by an increase borrowing attributed to
business expansion. The increase is also attributed to the impact of
losses due to changes in the fair value of derivative financial
instruments that are not designated as hedges and are marked--to market
at the end of each period (Toyota, 2008).
Selling and general administrative expenses increased by [yen] 17.5
billion, or 0.7% to [yen] 2,498.5 billion during fiscal 2008 compared
with the prior year. This increase mainly reflects an increase for the
financial services operations. The increase for financial services
operations is primarily attributed to the impact of increased expenses
Research and development expenses increase by [yen] 68.1 billion,
or 7.6%, to [yen] 958.8 billion during fiscal 2008 compared with the
prior year. This increase primarily relates to expenditures attributed
to the development of environmentally conscious technologies including
hybrid and fuel--cell technology, aggressive developments in advanced
technologies relating to collision safety and vehicle stability controls
and the impact of expanding new models to promote Toyota's strength
in a global market to further build up competitive strength in the
future (Toyota, 2008).
Toyota's net income increased by [yen] 73.80 billion, or 4.5%,
to [yen] 1,717.80 billion during fiscal 2008 compared with the prior
year. Toyota's ROE decreased from 14.7% in 2007 to 14.5% in 2008.
Historically, Toyota has funded its capital expenditures and research
and development activities primarily through cash generated by
operations (Toyota, 2008).
Toyota expects to sufficiently fund its capital expenditures and
research development activities in fiscal 2009 through cash and cash
equivalents on hand and increases in cash and cash equivalents from
operating activities. Toyota funds its financing programs for customers
and dealers, including loans and leasing programs, from both operating
cash flows and borrowings by its finance subsidiaries. Toyota also seeks
to expand its ability to raise funds locally in markets throughout the
world by expanding its network of finance subsidiaries (Toyota, 2008).
For fiscal 2008, the net cash provided by operating activities of
TMC decreased because of the increase in cash payments of cost of
products sold and increase in payment of taxes. Net cash used in
investing activities increased in fiscal 2008 because of the increase in
additions to finance receivables, increase in purchases of marketable
securities and security investments and the increase in additions to
fixed assets. Net cash provided by financing activities in fiscal 2008
decreased because of the increase in repayments of long term debt
Total capital expenditures of property, plant and equipment,
excluding vehicles and equipment on operating leases, increased by 3.8%
compared to the prior year. The increase in capital expenditure resulted
primarily from the impact of higher investments in subsidiaries located
in Japan and North America. Total expenditures for vehicles and
equipment on operating leases increased by 1.2% compared to the prior
year. This is due primarily to business expansion in the financial
services operations (Toyota, 2008).
Based on 2008 annual report, Toyota expects that overall steady
growth of the world economy will continue be driven by resource--rich
countries and emerging countries in fiscal 2009, despite factors such as
concerns about the U.S. economic trend, fluctuations in exchange rates
and the stock market, and energy and raw material prices trend (Toyota,
SYNTHESIS AND RESEARCH GAP
Environmental accounting is still in its early stages of adoption
but could be considered an operationalization of the construct of
corporate social responsibility. Carroll's (1952) view of
discretionary expectations is relevant to Japan's view of
environmental protection. The same importance may not be as relevant to
other developing countries that could not sacrifice foreign direct
investment by upholding environmental laws and regulations. However,
considering globalization and power of multinational companies to move
CSR further and influence the policies and practices of developing
countries, TMC is in the position to set the standard for environmental
accounting and reporting.
Steiner (1971) has emphasized that the larger a company grows, the
more responsibility it has over its society and this is reflective of
TMC's size, geographic scope and environmental activities.
Studies have attempted to integrate sustainability reporting with
traditional financial reporting. However, from an external perspective
and with the availability of processed information, analyst may not be
able to fully adopt the exploratory frameworks.
Environmental reporting in Japan is considered
'voluntary' but the magnitude of adoption is tantamount to
being compulsory. The objectives of this paper may therefore become
relevant in justifying the costs with the corresponding benefits of
environmental accounting. Companies may not be as large or as profitable
as TMC but as Steiner (1972) points out, there may be shortrun or
long-run profitability in being socially responsible.
Using secondary data sources, TMC's annual reports and
sustainability reports will be downloaded from the company website. The
study shall cover the period 1998 to 2009. Research procedure. To meet
the above objectives, we processed the information qualitatively. With
the aid of basic correlation analysis, we can determine whether or not
environmental cost moves in the same direction as with economic effects
and we can determine whether or not environmental cost moves in the same
direction with company's profitability.
Using the Minitab, we measured the central tendency, variability
and the shape of ungrouped data of environmental costs, economic
effects, and profitability ratios. We used a box and whisker plot to
determine whether or not there are outliers in the environmental costs,
economic effects, profitability ratios data. We also used a scatter
graph to check whether there is linear relationship between
environmental costs and economic effects, and between environmental
costs and profitability. To analyze the degree of association between
economic effects and environmental costs, we used the spearman's
rank correlation. Spearman's rank correlation is a nonparametric
test, meaning a distribution-free statistics (Black, 2008). Since there
are only 11 observations in our study, we deemed to be appropriate not
to use Pearsonproduct moment correlation. It is because we cannot assume
that the population of our data is normally distributed since there are
only 11 observations, and we cannot say that the variables follow linear
relationship (refer to appendix A). The Pearson correlation coefficient
is unbiased and efficient, provided that the population is normally
distributed. Therefore, we can say that the Pearson product moment
correlation coefficient is not robust. Moreover, it is not also outlier
resistant and it only measures the degree of linear relationship. To
compute for the Spearman's rank correlation coefficient, we used
free statistical software downloaded from www.wessa.net.
We also used the spearman rank correlation coefficient to discover
the strength of a link between environmental costs and profitability. A
spearman's rank correlation coefficient of -1 means perfectly
negatively correlated. A spearman's rank correlation coefficient
of+1 means perfectly positively correlated. While a spearman's rank
correlation coefficient of 0 means no correlation at all.
The following profitability ratios shall be computed to indicate
profitability: return on sales, dividend per share, and earnings per
share. The economic effects (actual effects), measured in reduction of
costs, sales of recyclable wastes and other income shall be related with
total environmental costs to establish cost benefit. Since these
accounts were presumably extracted from financial reports, a test of
relevance shall be done to effectively perform a cost benefit analysis.
Also, an environmental cost which is the summation of investments and
expenses shall be expressed as a percentage of net revenues to weigh its
impact on financial performance.
RESULTS, ANALYSIS AND DISCUSSION
TMC' environmental costs have been increasing from 1998 to
2008 along side with revenues. Initially, it can be related that
environmental costs are a fixed portion of revenues but analysis below
will show otherwise. Environmental costs were from 0.89% of revenues in
1998 to 0.96% of revenues in 2008.
Profitability has been posted at the rate of 3.7% return on sales
in 1998, nearly 5% in 2003, and 6.5% in 2008. Toyota's assets have
grown to more than double from JPY 14.8, in 1998, to JPY 32.5 trillion,
The equity base had gradually decreased from 44.2% of assets in
1998 to 36.6% in 2008. This could be attributed to the expansion of the
company to overseas locations through debt financing. In 2008, even if
the debt ratio was 63.4%, Japan has a debt-oriented economy and such a
ratio could be considered normal since the source of capital come mainly
from Japanese banks (Saudagaran 2004).
Toyota's Environmental Report
TMC's environmental accounting in its sustainability report
follows Japan's prescribed format for reporting. Environmental
costs are divided into environmental investments and maintenance costs,
similar to traditional accounting classification of assets and expenses.
Investments, regardless of generally accepted accounting
principles, include: research and development (otherwise not
classifiable as asset); recycling-related investments; other expenses on
social contribution; ISO certification; education and training; and
investment in plant and equipment (like any tangible asset but pertinent
to recycling, prevention of global warming and eco-efficiency).
Maintenance costs include expenses related to environmental
measures of waste processing, waste water treatment, atmospheric
pollution and environmental preservation. In addition to the maintenance
costs are: awareness building, professional environmental staff and
environmental restoration (vehicle recalls and soil and ground water
remediation). Included in the TMC's sustainability report are its
economic effects of environmental accounting. Those are the economic
benefits of environmental costs & investments measured into
reduction in energy costs, reduction in waste processing costs, sales of
recyclable goods, and other income from environment related
We measured the central tendency, variability and shape of the
data. We also determined the degree of association between variables
using Spearman's rank correlation coefficient. From 1998 to 2008,
TMC's average environmental cost is JPY 187.25 billion, while its
median is around JPY 201.60 billion. The dispersion of yearly
environmental cost incurred by TMC around its mean has an average of JPY
69.92 billion. Based on the box and whisker plot shown on Appendix A,
there are no mild nor extreme outliers which may affect the computation
of the mean and in the end affect the computation of Spearman's
correlation coefficient. Hence no remedies are needed to eliminate the
outliers. The box and whisker plot showed that the distribution of the
data is negatively skewed.
From 1998 to 2008, TMC's average economic effect is JPY 8.3545
billion, while its median is around JPY 5.8 billion. The dispersion of
yearly economic effect around its mean has an average of JPY 5.1306
billion. Based on the box and whisker plot shown on Appendix A, there
are no mild nor extreme outliers which may influence the computation of
Spearman's correlation coefficient. It is also shown that the
economic effect is positively skewed. Based on the scatter plot of
economic effects and environmental costs shown on Appendix A, the said
variables do not seem to follow a linear relationship. Hence, it may be
appropriate to use Spearman's rank correlation coefficient.
To prove our first alternative hypothesis that economic effect has
significant positive correlation with environmental costs, we used
Spearman's rank correlation coefficient to test the hypothesis. As
mentioned in the research design section, we used a free statistical
software to compute for the Spearman's rank correlation
coefficient. The critical t-value for a one tailed test, with alpha
equivalent to 0.05 is 1.83. Therefore, if the observed t-value is
greater than the critical t-value, then, environmental cost has a
significant positive effect to economic effect.
After plugging the data into the software, we were able to obtain
the Spearman's rank correlation coefficient of environmental cost
and economic effect. The coefficient of correlation is 0.85, indicating
that there is a positive correlation between the said variables. Is the
relationship significant? Yes. The positive relationship between
economic effect and environmental cost is significant because the
observed t-value, as per Table 1 above, generated in the process is 4.88
which is more than its critical t-value of 1.83. Further, we can say
that the degree of association between economic effect and environmental
cost is somewhat strong. .
From 1998 to 2008, TMC's average net revenues, ROE and
dividend per share is JPY 16,967 billion, 10.94%, and JPY 56.273 per
share, respectively. The dispersion of yearly net revenues, ROE and
dividend per share around the mean is JPY4,970 billion, 3.51% and JPY
42.26 per share, respectively. There are no outliers found in the
dataset for net revenues, ROE and dividend per share. Moreover, all are
positively skewed, except ROE.
To prove our second alternative hypothesis that profitability has
significant correlation with environmental costs, we again use
spearman's rank correlation coefficient. Each profitability
measurement was tested separately for correlation with environmental
cost. The following are the details in relation to the result of the
Since the observed t-values of net revenues, dividend per share and
ROE are greater than the critical 2-sided-t-value, treated separately,
therefore there exists significant evidence against the null hypothesis.
Therefore, based on the test of significance for spearman's
correlation coefficient, there is significant positive correlation or
association between net revenues and environmental cost, between ROE and
environmental cost, as well as dividend per share and environmental
cost. Net revenues and dividend per share has the strongest correlation
with environmental cost.
One major criticism on CSR practices is the distribution of
ultimate shareholder wealth to the public. However, the test of
correlation on environmental costs and return on equity (and or
dividends per share) shows positive relationship. This could suggest
that environmental activities contribute to shareholder value, thus,
strengthening the Shareholder Value Theory.
However, the results of the Spearman's rank correlation
coefficient are not conclusive as to determine the causality between
profitability and environmental cost. Environmental cost is not the only
explanatory variable that explains the changes in profitability of the
firm, nor can we say that profitability explains environmental cost.
Determination of causality between variables requires the creation of a
regression model and subjects it to more complicated statistical test to
generate the best linear unbiased estimators. Care should be taken in
interpreting the results of Spearman's rank correlation
Environmental cost is the sum of environmental expenses and
investments in assets. These absolute amounts published in TMC's
sustainability reports could be weighed with the conceptual, empirical
and actual benefits measured in cost savings.
The benefits in the form of cost savings and other income totaled
JPY 10 billion in 2005, JPY 13 billion in 2006 and JPY 15 billion in
2007. These would, otherwise, have gone into waste had TMC not engage in
environmental accounting. If compared with the enviromental costs, the
measurable ratio benefits would amount only from 5% to 6%.
However, as Orlitzky pointed conceptually, the benefits could range
from efficiency, increasing competitors' costs, attracting more
productive workforce, boosting sales revenues, and reducing business
risk. More importantly, there are strong theoretical arguments for the
reverse causation of financial performance and corporate citizenship
The tangible benefits were cited likewise by Porter (2008) but he
was more specific on materials savings, increase in process yields,
better utilization of by products, conversion of waster into valuable
forms, low energy consumption, reduced material storage and handling
costs, savings from safer workplace conditions and elimination of clean
up costs. In addition, the product benefits are higher quality, lower
production cost, more efficient use of resources, safer products, lower
cost of disposal and higher resale value of products (Porter 2008).
In the foregoing discussion, there are many benefits of
environmental cost both conceptually and empirically based. Based on the
results and discussion, as well as data analysis, we found that there is
significant correlation between economic effects and environmental
costs. In addition, there is a significant correlation between
profitability and environmental costs.
This study described Toyota Motors Corporation's environmental
accounting within Japan's prescribed guidelines and focused on the
environmental costs and benefits. The measurable costs have outweighed
the direct tangible benefits but there are suggestions of indirect
benefits. After conducting correlation tests, it figured that economic
effects are significantly positively correlated with environmental cost.
Meaning, if environmental cost increases, we can also see that economic
effect increases as well, or if the environmental cost decrease, the
economic effect also decreases and the probability of them increasing or
decreasing together is not due to chance.
Since economic effects is included in the computation of net income
and later on closed to equity, it can be inferred that ROE will also be
affected with the increase in environmental cost. Such relationship was
tested using Spearman's rank correlation and the test showed that
there is indeed a significant correlation between ROE and environmental
cost. It is important to note that the test only showed whether there is
a significant correlation between the variables. The test does not show
whether the change in environmental cost will cause a significant or
material change in the financial performance of the business. The least
is that our test could suggest causality between the variables but
further test should be done to establish so. Meanwhile, literature point
to causality and reverse causation between corporate citizenship and
financial performance (Orlitzky 2008). Moreover, our test showed that
net revenues and dividends per share are significantly correlated with
Orlitzky (2008) and Porter (2008) have both highlighted the
benefits of cost efficiency, savings from recyclable materials and by
products and boosting sales with the company's reputation of
engaging in high quality production systems that minimize waste and harm
to the environment.
Further studies should be made, such as regression analysis, to
establish causality between environmental cost and economic effect and
to establish causality between environmental cost to company's
profitability. Since TMC has published data for environmental cost and
economic effect for more than 10 years, time series study should be done
to better understand the effect of environmental cost to economic effect
and company's profitability.
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Environmental accounting aims at achieving sustainable development,
maintaining a favorable relationship with the community, and
pursuing effective and efficient environmental conservation
activities. These accounting procedures allow a company to identify
the cost of environmental conservation during the normal course of
business, identify the benefits gained from such activities,
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monetary value or physical units) and support the communication of
Spearman's rank order correlation--profitability measurements
with environmental cost
Net Revenues Dividend per share ROE
Correlation (not 0.96 0.96 0.86
Correlation (corrected) 0.96 0.96 0.86
t-test n>10 10.82 10.46 5.14
Degrees of freedom 9.00 9.00 9.00
Critical 2 sided t-value 2.26 2.26 2.26
Critical 1 sided t-value 1.83 1.83 1.83
D-square value 8.00 8.50 30.00
D-square value (expected) 220.00 220.00 220.00
Standard Deviation 69.57 69.57 69.57
z-Test -3.05 -3.04 -2.73
Probability 0.00 0.00 0.01
Observations 11.00 11.00 11.00
Source: Wessa, P. (2010), URL http://www.wessa.net/
Summary for Environmental Costs
Anderson-Darling Normality Test
S kew ness -0.16244
1st Quartile 103.60
3rd Quartile 249.80
95% Confidence Interval for Mean
95% Confidence Interval for Median
95% Confidence Interval for StDev
Summary for Economical Effects
Anderson-Darling Normality Test
1st Quartile 4.3000
3rd Quartile 13.3000
95% Confidence Interval for Mean
95% Confidence Interval for Median
95% Confidence Interval for StDev
Summary for Net Revenues
Anderson-Darling Normality Test
S kew ness 0.813340
1st Quartile 12758
3rd Quartile 21037
95% Confidence Interval for Mean
95% Confidence Interval for Median
95% C onfidence Interval for StDev
Summary for ROE
Anderson-Darling Normality Test
1st Quartile 0.07100
3rd Quartile 0.14500
95% Confidence Interval for Mean
95% Confidence Interval for Median
95% Confidence Interval for StDev
Summary for Dividend per share
Anderson-Darling Normality Test
1st Quartile 24.000
3rd Quartile 90.000
95% Confidence Interval for Mean
95% Confidence Interval for Median
95% Confidence Interval for StDev
Result of Spearman's rank correlation coefficient--environmental
costs and economic effects
Correlation (not corrected) 0.85
Correlation (corrected) 0.85
t-Test (n>10) 4.88
Degrees of Freedom 9.00
Critical 2-sided T-value (5%) 2.26
Critical 1-sided T-value (5%) 1.83
D-square value (calculated) 32.50
D-square value (expected) 220.00
Standard Deviation 69.57
Source: Wessa, P. (2010), URL http://www.wessa.net/