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Do markets care about social and environmental performance? Evidence from the Tokyo stock exchange.
Japan's environmental accounting and reporting has been in practice for over a decade now, as facilitated by the Ministry of Environment guidelines. Sustainability's triple bottom-line, however, is seen not from a balanced perspective but with a strong focus on environmental conservation over social performance. Sustainability reports show genuine environmental philosophies while social concerns appear to have been designated as mainly a function of the government.

In this paper, I review the sustainability and annual financial reports of the top 20 actively traded manufacturing companies in the Tokyo Stock Exchange and aim to establish if there is any impact of social and environmental performance over financial performance. By using panel data from 2004 to 2009, I collectively regress social and environmental costs with measures of market and financial performance.

Following literature on virtuous cycles, I alternatively explore if it exists for Japan's top listed companies. The expectations of my study point to the insignificance of social performance as observed in the Japanese business environment while having a predominant concern for the natural environment. Consistent with literature on the link of Corporate Social Performance (CSP) with financial performance, my findings support the perspectives of resource-based view and the slack availability of resources.

Environmental auditing (Evaluation)
Environmental economics (Analysis)
Manufacturing industry (Securities)
Cortez, Michael Angelo A.
Pub Date:
Name: Journal of International Business Research Publisher: The DreamCatchers Group, LLC Audience: Academic Format: Magazine/Journal Subject: Business, international Copyright: COPYRIGHT 2011 The DreamCatchers Group, LLC ISSN: 1544-0222
Date: Sept, 2011 Source Volume: 10 Source Issue: S2
Event Code: 810 Securities issued, listed Computer Subject: Company securities
Geographic Scope: Japan; United Kingdom Geographic Code: 9JAPA Japan; 4EUUK United Kingdom
Accession Number:
Full Text:

Japan, together with the U.K. and Germany, was highlighted by Kolk (2003) as practicing advanced sustainability reporting through government facilitation. As early as the turn of the century, the private manufacturing sector, the academe and other stakeholders coordinated with the Ministry of Environment (MOE) in drafting the guidelines for environmental accounting and reporting.

A decade after, the MOE has observed increasing compliance particularly from publicly listed companies, on reporting environmental conservations costs which are classified either as maintenance costs or investments.

Over the years, scholars have been searching for ways to operationalize sustainability performance from its root construct of CSR and CSP. Japanese companies are particularly interesting to examine because of the availability of data which spans from 2000 to 2010, with varying levels of adoption from automotives, electronics, and diversified companies, heavy industries, pharmaceuticals, and chemicals manufacturing and utilities companies.

My study explores if there is any positive relationship between environmental innovations and market and firm financial performance, following the resource-based view perspective. Environmental innovations are measured in terms of environmental accounting costs shown in the sustainability reports. Market performance is operationalized as to high stock market price in a year and book value per share. Firm financial performance in this study refers to measures of revenue, profitability, firm size, leverage, and equity. I explore further if the relationship between these constructs is bi-directional as earlier espoused by CSP scholars. Advocates of the slack availability of resources suggest that social and environmental performance is facilitated by the availability of financial resources (Ullman 1985). These perspectives, however, are not mutually exclusive and could be combined in what I call the accumulated slack theory (Cortez 2010). The two-way direction of relationships affects both the accumulated tangible and intangible benefits over time realized by management, from social and environmental innovations.


Deloitte Touche Tohmatsu, a leading global accounting firm, published The Sustainable Auto Report in 2001 highlighting the strengths and weaknesses of sustainability reporting practices. While there is genuine environmental concerns in the corporate philosophy of automotive manufacturers with detailed discussions on product life cycles, innovation, technological options and eco-efficiency, there seems to have been limited discussions on matters that have or could have a bearing both on risks and opportunities, and on short- and long-term financial performance. More than half the reports evaluated in the study scored low (0 or 1) in the description of financial implications of environmental or social issues.

Kokubu & Nashioka (2002) covered the years 1998 to 2000, in a survey of environmental accounting practices of listed companies in Japan. They view environmental accounting 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). They criticize the current practice and see the comparability of these costs amongst companies as not so reliable yet, because companies conforming to the guidelines are left with much discretion in recognizing and reporting environmental costs. The problems in defining environmental costs could stem from the lack of standard definition, distorted calculations, access to information, hidden costs and cost internalization (Jasch, 2002).

The comparison of environmental costs and financial figures such as sales is probably helpful in seeing trends in companies' environmental conservation activities. The benefits of environmental accounting includes: improvement of corporate image while enhancing consciousness within the company; reduction of environmental burden; reduction of environmental costs; development of environmentally friendly products; and the improvement of environmental decision-making (Kokubu & Nashioka, 2002). These are all consistent with Orlitzky's (2008) theorization of the benefits of environmental accounting.

Kokubu & Nashioka (2002) correlate environmental costs with sales, net income and assets but had to consider only the business area costs, upstream and downstream costs, and management activity costs. They saw the ambiguity of R&D costs, social activity costs and environmental damage costs in making the total environmental costs comparable. Using Spearman's correlation coefficient analysis, they concluded that there is positive correlation with non-consolidated data and strongly positive correlation for consolidated data. They suggested further studies, considering that in 2002 standardization was in place, and expected widespread compliance amongst Japanese companies. Meanwhile, their study revealed certain differences in environmental accounting practices according to company size and industrial sector.

Environmental performance having a two-way positive impact on financial performance on Japanese companies has been examined statistically by Nakao, Amano, Matsumura, Genba and Nakano (2007). They used the environmental performance score by the Nikkei Environmental Management Survey as the variable controlled by the rate of increase in revenues, R&D expenses to sales ratio, sales to total assets ratio, and financial leverage. They suggest that the phenomenon of virtuous cycles is fairly recent as other scholars caution that it may not hold for a longitudinal basis.


Panel data regression analysis is performed on 20 out of 50 top actively traded companies in the Tokyo Stock Exchange comprising automotive, diversified, electronics, and heavy industries. It is notable that half the 50 companies are in the manufacturing sector, and the companies in my study compose the significant big players. Fixed effects and firm specific factors are captured in the panel data regression for the period 2004 to 2009. Environmental accounting cost information is taken from their sustainability or CSR reports published a year after their annual financial reports. The first direction of the model shows environmental costs as the independent variable affecting market performance and financial performance. This follows that the resource-based view perspective that espouses investments in CSR has tangible benefits. The reverse direction of the relationships uses environmental accounting information as the dependent variable, following the slack availability of resources view where good market and financial performance facilitate investments in corporate social and environmental performance.


Based on the concurrent bi-directionality of environmental innovations costs and market performance, I therefore hypothesize:

H1a: Environmental innovations costs positively impact market performance measured in high stock price and book value per share.

H1b: Market performance in previous periods positively impact environmental innovations costs.

Kokubu and Nashioka (2002) have earlier established the relationship between environmental innovations cost and financial performance. I pick it up from their findings in 1998 to 2000 and pursue further the relationships of these variables from 2004 to 2009 when presumably more comparable and consistent data are now available. I hypothesize:

H2a: Environmental innovations costs positively impact financial performance measured in firm size, revenues, profit, liquidity, accounting risk, and intangible asset value.

H2b: Financial performance in previous periods positively impact environmental innovations costs.


Environmental Innovations & Market Performance

High price for the year, the book value and owners' equity appear to be significantly and positively influenced by environmental innovations as shown by the 0.000 p-values. The high adjusted r-squared which ranges from 0.88 to 0.97 also validate the findings (see Table 1.) These suggest that the market appreciates the environmental innovative practices of companies covered in my study. Increases in stock price cause increases in the book value of common stock and eventually affects the stockholders' equity. I therefore accept H1a that environmental innovations costs positively impact market performance.

On the other hand, the reverse directions of constructs relationships appear to be stronger with a higher R-squared and adjusted R-squared. This supports the fact that companies, to start with, invested in environmental innovations by committing resources. With the felt benefits in market performance, these companies invested further resources. Likewise, I accept H1b that market performance affects investments in environmental innovations costs of TSE manufacturing companies.

Environmental Innovations & Financial Performance

Firm size, revenue, liquidity and risk minimization appear to be the predominant concern why TSE listed manufacturing companies engage in environmental innovations. This holds true for both directions of constructs relationships.

Environmental innovations involve investments in environmental assets, clean technology and production facilities that reduce C[O.sub.2] emissions. Environmental innovations costs appear to have a positive relationship with firm size with p-values of 0.000 and high r-squared 0.9823 and adjusted r-squared 0.9788 (see Table 1). This holds true for the reversal direction of relationships with environmental innovations as the dependent variable (see Table 2). However, this is expected because the sample size captures the top actively traded TSE companies which presumably are large corporations.

The p-value for sales (revenue) is 0.000 with an adjusted r-squared value of 0.9800 suggesting goodness of fit. This suggests that revenues of these Japanese manufacturing companies are positively controlled by environmental innovations. The customers of these companies appreciate the environmental performance and it translates to patronage or sales for the companies. There appears to be concurrent bi-directionality as the results in Table 2 somehow mirror the results in Table 1.

Current assets and current liabilities also show 0.000 p-values and adjusted r-squared values of 0.9831 and 0.9714 suggesting goodness of fit. It is not surprising that there is a positive impact on current assets because revenue generation may immediately translate into increases in receivables and eventual cash collections. However, it is interesting to examine the impact on short-term liabilities. It may be deduced that short-term liabilities increase alongside with environmental innovations, to finance environmental maintenance costs and other short-term expenses. The reversal direction of constructs relationships, on the other hand, appears to be stronger (See Table 2). The adjusted r-squared values are higher for current assets and current liabilities. This suggests how the first direction is reinforced in this cycle of mutually reinforcing variables.

Exploring the impact of liabilities also reveal positive and significant impact with 0.000 p-values. This suggests that as environmental innovations costs increase, long-term debt and total liabilities increase. It can be deduced that long-term debt is used in financing environmental innovations and other environmental assets. The p-values are 0.000 and the adjusted r-squared are 0.9695 and 0.9734, respectively. Contrary to the business rationale for sustainability, the coefficient is not negative. Hence, risk is not minimized for these Tokyo Stock Exchange-listed companies. However, it should be noted that the Japanese business environment is inherently debt oriented in contrast to western economies that source their financing from their active capital markets.

Contrary to my earlier research (Cortez 2010) on environmental innovations and financial performance of Japanese automotive and electronics companies, profitability turned insignificantly related to environmental innovations. Although from the same manufacturing sector, the companies considered from other manufacturing industries perhaps have varied responses to the recent global economic crisis and appreciating Japanese yen. It is hereby recommended that industry circumstances be investigated, to qualify conclusions on the relationships of these constructs.

Therefore, I accept H1a and H1b that environmental innovations impact market performance; and vice versa. However, I qualify the acceptance of H2a and H2b to as far as firm size, revenues, liquidity and risk minimization. The impact of environmental innovations on profitability and intangible assets is not supported empirically for these TSE listed companies.


This paper supports the earlier theorization on the resource-based view perspective and the slack availability of resources. Panel data evidence from the top actively traded manufacturing companies for a six-year period (2004 to 2009) support the bi-directional relationship of the constructs--with the first direction being that social and environmental performance impacts market and financial performance, and then vice versa.

The markets care about environmental performance measured in environmental accounting costs. However, social costs are an immaterial, and hence, insignificant factor to financial performance presumably because this is a concern of the government while businesses have overwhelming focus on the environment.

Concurrent bi-directionality is observed between environmental and financial performance as far as firm size, revenue generation, liquidity and risk management. The coefficient for accounting risk / long-term debt did not turn negative as expected but rather show a positive sign. This reflects the uniqueness of the Japanese business environment that relies heavily on debt as the primary source of financing. Profitability and intangible asset values do not appear to be significantly related to social and environmental performance.

With coefficients of the first direction stronger than the reversal direction, I deduce that there is accumulation of benefits from this bi-directional relationship of constructs. It is hereby recommended that longer time periods be covered in the succeeding studies to permit causality tests of variables on these manufacturing companies. Likewise, a longer time lag of cause and effect may be explored to alternatively determine if markets do care about social and environmental performance of these Japanese manufacturing companies.


Cortez, M. A. (2010). The Cost of Environmental Innovations and Financial Performance. Comparative Case Study of Japanese Automotive and Electronics Companies. Doctoral Dissertation. De La Salle University, Manila, The Philippines, October 2010.

Deloitte Touche Tohmatsu (2001). The sustainable auto report. Retreived from December 2009.

Jasch, C. (2002). Environmental management accounting metrics: procedures and principles. Environmental management accounting: informational and institutional developments. (pp.37-50). Dordrecht, Netherlands. Kluwer Academic Publishers.

Kokubu, K., & Nashioka, E. (2002). Environmental management accounting practices of Japanese manufacturing sites. Eco-efficiency in Industry and Science. Institute for Global Environmental Strategies (IGES).

Kolk, A. (2003). Trends in sustainability reporting by the Fortune Global 250. Business Strategy and the Environment, 12(5), 279-285.

Nakao, Y., Amano, A., Matsumura, K., Genba, K., & Nakano, M. (2007). Relationship between environmental performance and financial performance: an empirical analysis of Japanese corporation. Business Strategy and the Environment, 16, 106-118. doi: 10.1002/bse.476

Orlitzky, M. (2008). Corporate social performance and financial performance: a research synthesis. Chapter 5. The Oxford handbook of corporate social responsibility (pp. 113-134). Oxford Press.

Ullmann, A. (1985). Data in search of a theory: a critical examination of the relationships among social performance, social disclosure, and economic performance. Academy of Management Review, 10, 540-577.

* research assistance by Christopher James Cabuay of the De La Salle University Manila, School of Economics.

Michael Angelo A. Cortez, Ritsumeikan Asia Pacific University
Table 1. Impact of environmental costs on market and financial

Independent: environmental innovations

Dependent variables       Coeff.     P> [absolute value of t]

High price for 1 year    36.69432               0
Book value              0.0124926               0
Equity                   20.67689               0
Asset turnover          0.0007961             0.151
Assets                   54.75074               0
Return on assets        -0.0212175            0.309
Sales                    51.71664               0
Pretax income           0.2019439             0.927
Taxes                   0.3992472             0.584
Income                  0.0521775             0.974
Net profit margin       -0.0285235            0.179
Current assets           19.14795               0
Current liabilities      20.05858               0
Long-term debt           8.480828               0
Total liabilities        34.07388               0
Intangible assets       0.7808023             0.192

Dependent variables     R-squared   Adj. R-squared

High price for 1 year    0.9045         0.8852
Book value               0.9761         0.9713
Equity                   0.9753         0.9703
Asset turnover           0.9515         0.9417
Assets                   0.9823         0.9788
Return on assets         0.6381         0.565
Sales                    0.9834          0.98
Pretax income            0.6453         0.5737
Taxes                    0.7155         0.6581
Income                   0.6278         0.5527
Net profit margin        0.7395         0.687
Current assets            0.986         0.9831
Current liabilities      0.9762         0.9714
Long-term debt           0.9823         0.9787
Total liabilities        0.9821         0.9785
Intangible assets         0.846         0.815

* Level of significance 0.01; homoscedastic; no autocorrelation.

Table 2. Impact of market and financial performance on environmental

Dependent: environmental innovations

Independent variables     Coeff.     P> [absolute value of t]

High price for 1 year   0.0042452               0
Book value               21.10281               0
Equity                  0.0154194               0
Asset turnover           22.6137              0.151
Assets                  0.0067683               0
Return on assets        -0.4282085            0.309
Sales                   0.0081179               0
Pretax income            0.000371             0.927
Taxes                   0.0066011             0.584
Income                  0.0001734             0.974
Net profit margin       -0.5537829            0.179
Current assets           0.018792               0
Current liabilities     0.0148892               0
Long-term debt          0.0273516               0
Total liabilities       0.0097257               0
Intangible assets       0.0190476             0.192

Independent variables   R-squared   Adj. R-squared

High price for 1 year    0.9721         0.9664
Book value               0.9756         0.9707
Equity                   0.9775         0.9729
Asset turnover           0.9675         0.9609
Assets                   0.9792         0.975
Return on assets         0.9672         0.9606
Sales                    0.9808         0.9769
Pretax income            0.9669         0.9602
Taxes                     0.967         0.9603
Income                   0.9669         0.9602
Net profit margin        0.9674         0.9609
Current assets           0.9788         0.9745
Current liabilities      0.9768         0.9721
Long-term debt           0.9746         0.9695
Total liabilities        0.9779         0.9734
Intangible assets        0.9674         0.9608

* Level of significance 0.01; homoscedastic; no autocorrelation.
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