DP2014-34

The Role of Corporate Environm ental
Disclosures: A n Empirical Analysis of
the Influ ence of a Firm ʼs Environm ental
Initia tiv es on Its Economic Performa nce
Kimitaka NISHITANI
Katsuhiko KOKU BU
October 14, 2014

The role of corporate environmental disclosures: An empirical analysis of the influenceof a firm’s environmental initiatives on its economic performance
Kimitaka Nishitani *Research Institute for Economics and Business Administration, Kobe University

andKatsuhiko Kokubu
Graduate School of Business Administration, Kobe University

Abstract
The purpose of this study is to empirically analyze the influence of a firm’s environmental initiatives
on its economic performance, taking into account the role of environmental disclosures. This isbecause although the positive influence of environmental initiatives on economic performance
generally results from plural paths, involving both an improvement in productivity and an increase indemand, it is expected that the environmental initiatives through an increase in demand will not
directly but indirectly via disclosed information influence economic performance. Indeed, thediscussions in the literature on social and environmental accounting support this possibility. The
theoretical model derived from a Cobb–Douglas production function and an inverse demand
function predicts that a firm’s environmental initiatives enhance economic performance through an
improvement in productivity and/or an increase in demand, and the environmental disclosures aresubstituted for environmental initiatives through an increase in demand for the empirical estimations.
The empirical findings that used panel data on Japanese manufacturing firms from 2010 to 2012
support the view that although environmental initiatives enhance economic performance, even if
only the effect of an improvement in productivity is considered, environmental initiatives enhance
economic performance further if the effect of an increase in demand is also considered; thus
environmental disclosures play an important role for the relationship.

Keywords
Environmental disclosures; Environmental initiatives; Economic performance; Improvement inproductivity; Increase in demand; Fixed effects instrumental variables model*

kimitakan@rieb.kobe-u.ac.jp
11. Introduction
Environmental initiatives have become a key corporate priority in order to succeed in business formany firms, although it was conventionally believed that there was a trade-off between a firm’s
environmental initiatives and its economic performance (Porter and van der Linde, 1995). To
confirm this, many empirical studies have analyzed this relationship and found, in fact, that there
was a positive relationship between a firm’s environmental initiatives (and environmental
performance) and economic performance (economic performance generally means financial
performance in this paper) as reviewed in the next section. The positive influence of environmental
initiatives on economic performance generally results from plural paths, involving both an
improvement in productivity and an increase in demand (Nishitani, 2011). Poor environmental
initiatives are regarded as reflecting poor management practices and a lack of innovativeness intaking up the potential cost savings available by reducing environmental impacts (Hart and Ahuja,
1996; Russo and Fouts, 1997). For example, use of unnecessary inputs is decreased and production
processes are optimized when focusing on the introduction of cleaner production processes thatprevent the generation of environmental impacts in manufacturing through process-by-process
innovation (Baas, 1995; Nishitani et al., 2011). Then, through environmental initiatives, firms can
reduce both their environmental impact and production costs. However, better environmental
initiatives provide positive information about environmentally friendly firms and their products tothe public, and this enables firms to increase their market share and/or charge higher prices for theirproducts where consumers have preferences for environmental protection (Khanna, 2001; Khanna etal., 1998). In Japan, for example, the number of firms and government administration offices thatspecify environmental initiatives as a condition for transactions with suppliers is increasing(Japanese Ministry of the Environment, 2014). However, except for Nishitani (2011) and related
studies such as Nishitani et al. (2014, 2011), none of the empirical studies estimated these influences
simultaneously, although some studies such as Khanna (2001) discussed the possibility, and somestudies such as Darnall et al. (2007) and Heras-Saizarbitoria et al. (2011) estimated these influences
independently. Thus, to analyze the influence of a firm’s environmental initiatives on its economic
performance more precisely, it is necessary to analyze and distinguish both the influence of the
improvement in productivity and the influence of the increase in demand. The growing number ofsuch studies that analyze the specific influence of environmental initiatives is necessary to provide
new scientific knowledge not only for the academic field but also for business.
However, with respect to the positive influence occurring through an increase in demand, it isexpected that the environmental initiatives will not directly influence the economic performance, but
indirectly influence it through the environmental information disclosed by the firm. This is because
consumers who cannot directly observe corporate environmental initiatives that are implemented
inside the firm cannot evaluate them without any disclosed information. Indeed, Bullough and2Johnson (1995) suggested that environmental disclosures have the potential to be an important
marketing tool to establish competitive advantage. Furthermore, as introduced in Section 3, theanalysis of environmental disclosures in the literature on social and environmental accounting
supports this possibility. Thus, the analysis should also consider the role of a firm’s environmental
disclosures. Although some previous studies have focused on secondary environmental information,such as the environmental ranking of a firm, disclosed by third parties, and analyzed the influence of
this information on a firm’s economic performance (e.g. Nakao et al., 2007; Nishitani et al., 2011),
there is no study that focuses directly on the environmental information disclosed by the firm itself,
acting as a tool to actualize the influence on economic performance of environmental initiatives
through an increase in demand.
Therefore, the purpose of this study is to empirically analyze the influence of a firm’s
environmental initiatives on its economic performance, taking into account the role of environmental
disclosures. To achieve this purpose, this study applies a simple theoretical economic model derived
from a Cobb–Douglas production function and an inverse demand function to identify whether afirm’s environmental initiatives enhance economic performance through an improvement inproductivity and/or an increase in demand, as proposed by Nishitani (2011). Then, the environmental
disclosures are substituted for environmental initiatives through an increase in demand. The model
estimates these parameters using the fixed effects instrumental variables model for Japanesemanufacturing firms for the period 2010–2012. Even Nishitani (2011) and related studies did not
directly focus on the role of environmental disclosures for the influence of environmental initiatives
through an increase in demand. Furthermore, previous studies in social and environmental
accounting suggest that consumers are one of the important stakeholders for Japanese firms; thisstudy additionally analyzes the influence of environmental initiatives through an increase in demandin B-to-C (business-to-consumers) firms and B-to-B (business-to-business) firms respectively, toconfirm if the influence is different between final consumers and business consumers.
The main findings are as follows. First, a firm that implements environmental initiatives moreproactively is more likely to enhance economic performance through an improvement inproductivity even if the influence of the environmental initiatives through an increase in demand,
namely the role of environmental disclosures, is not considered. Second, a firm that implements
environmental initiatives more proactively is more likely to enhance economic performance throughan improvement in productivity and an increase in demand if the influences of the environmental
initiatives through both paths are simultaneously considered. Because the magnitude of the influenceof environmental initiatives through an improvement in productivity is almost equivalent, either withor without considering the influence of the environmental initiatives through an increase in demand,
estimation that focuses only on the influence of environmental initiatives through an improvement inproductivity will underestimate the total influence of environmental initiatives. Third, although the3influence of environmental initiatives through an increase in demand is only observed for B-to-C
firms, the influence is not statistically different to that for B-to-B firms.
This study is divided into the following sections. Section 2 reviews the literature on therelationship between environmental initiatives (and environmental performance) and economic
performance. Section 3 introduces the discussions of corporate environmental disclosures in theliterature on social and environmental accounting. Section 4 provides a theoretical economic modelof the influence of a firm’s environmental initiatives on its economic performance. Section 5
presents details of the data. Section 6 provides the estimation results. Section 7 presents theconclusion and implications.

2. Literature review on the relationship between environmental initiatives (andenvironmental performance) and economic performance
In this section, the literature on the relationship between environmental initiatives (andenvironmental performance) and economic performance are reviewed. Previous studies are classified
into studies focusing on financial performance such as return on assets (ROA) and return on sales(ROS), and those focusing on stock market performance such as stock price and Tobin’s q (Table 1).
We review these former studies below for the purpose of this study, which focuses on financial
performance (however, a summary of the latter studies is also shown in Table 1). Although they did
not focus on the role of environmental disclosures for the relationship, it is valuable for this study toreview them because their hypothesis that better (worse) environmental initiatives and performanceincreases (decreases) economic performance is consistent with ours at least in a broad sense.
In the second half of the 1990s, Hart and Ahuja (1996) analyzed 127 manufacturing firms inStandard and Poor’s 500 from 1989 to 1992 by multiple regression analysis, and found that a
reduction in total chemical substance emissions enhanced the ROA, ROS, and return on equities
over 1–2 years. Russo and Fouts (1997) analyzed 243 firms assigned environmental ratings by the
Franklin Research and Development Corporation (FRDC) from 1991 to 1992 by pooled data
analysis, and found that environmental rating scores by FRDC enhanced ROA.
In the 2000s, Sarkis and Cordeiro (2001) analyzed 482 US firms in 1993 by ordinary least squares(OLS), and found that both pollution prevention and end-of-pipe approaches were negatively related
to ROS. King and Lenox (2002) analyzed 614 US manufacturing firms from 1991 to 1996 by a fixed
effects regression, and found that pollution prevention enhanced ROA. Zhu and Sarkis (2004)
analyzed 186 Chinese manufacturing firms from 2002 to 2003 by moderated hierarchical regression,and found that green supply chain management practices had positive relationships with positive andnegative economic performance indicators. Darnall et al. (2007) analyzed approximately 4200
manufacturing facilities in Canada, France, Germany, Hungary, Japan, Norway, and the US in 2003
by a bivariate probit model, and found that several environmental performance measures, including a4

decrease in wastewater effluent, air pollution, and global pollutants such as greenhouse gases,
enhanced financial performance such as profitability and sales volume.
In the 2010s, Heras-Saizarbitoria et al. (2011) analyzed 196 Spanish firms from 2000 to 2005 by amultivariate panel data analysis, and found that firms with ISO 14001 certification achieved superior
ROA and sales volume. Iwata and Okada (2011) analyzed Japanese manufacturing firms from 2004
to 2008 by an industry-specific fixed effects model, and found that the reduction of greenhouse gas(GHG) emissions enhanced financial performance such as ROA, return on investment, and return on
invested capital, but the reduction of waste emissions did not. Nishitani (2011) analyzed 871
Japanese manufacturing firms from 1996 to 2007 by a fixed effects instrumental variables model,
and found that the implementation of an environmental management system enhanced a firm’s value
added through an increase in demand and improvement in productivity. Nishitani et al. (2011)
analyzed 426 Japanese manufacturing firms from 2002 to 2008 by a random effects instrumental
variable model, and found that a reduction of pollution emissions enhanced a firm’s value added byincreasing demand and improving productivity, although as the latter is conditional, a prevention
approach to reducing emissions is preferred. Hatakeda et al. (2012) analyzed 1,089 Japanesemanufacturing firms in 2007 by switching regression model, and found that although there was apositive relationship between a firm’s GHG emissions and ROA, this relationship is mitigated if thefirm had a positive stance on environmental management to reduce GHG emissions. Thoumy andVachon (2012) analyzed 79 environmental projects that took place in Canadian manufacturing firms
from 2001 to 2009 by OLS, and found that projects related to the main product or its underlying
production process were financially more beneficial, whereas pollution prevention technologies andenvironmental project size were not. de Burgos-Jime´nez et al. (2013) analyzed 186 Welsh firms
from 2003 to 2004 by multiple regression analysis, and found that environmental proactivity andenvironmental performance enhanced ROA and ROS, but environmental management did not.
Nishitani et al. (2014) analyzed 423 Japanese manufacturing firms from 2007 to 2008 by a random
effects instrumental variables model, and found that a firm’s GHG emissions management enhanced
its economic performance through an increase in demand and improvement in productivity. However,the latter effect is conditional. Although a firm’s efforts to maintain lower GHG emissions improved
productivity, efforts to reduce GHG emissions further did not always improve it, especially forenergy-intensive firms. Qi et al. (2014) analyzed 39 Chinese industrial sectors from 1990 to 2010 bya dynamic generalized method of moments instrumental variable model, and found that SO2
emissions per unit of industry value added enhanced industry-level ROA.
Thus, many studies found that environmental initiatives and performance would enhance
economic performance. However, most of them did not distinguish between the influence ofenvironmental initiatives through an improvement in productivity and an increase in demand, andeven Nishitani (2011) and related studies did not directly focus on the role of environmental
5

disclosures for the relationship. Accordingly, it is expected that these studies underestimated the total
influence of environmental initiatives on economic performance or did not suggest a causal
relationship between them in the strict sense. To overcome this issue, this study will analyze therelationship between environmental initiatives and economic performance with consideration of therole of environmental disclosures.

(Table 1)

3. Discussions regarding corporate environmental disclosures
Understanding corporate environmental disclosures, which are sometimes analyzed as a part ofsocial disclosures, has long been a major focus in the literature on social and environmental
accounting. If the role of environmental disclosures has not been considered when analyzing therelationship between environmental initiatives and economic performance, it is valuable tosupplement the discussions regarding this role by the studies on social and environmental accounting.
Thus, we consider how corporate environmental disclosures have been analyzed in these studies inorder to clarify the role of environmental disclosures for the relationship between environmental
initiatives and economic performance.
Corporate environmental disclosures are defined as those disclosures that relate to the impact offirm activities on the physical or natural environment in which they operate (Wilmshurst and Frost,2000). Hence, corporate environmental disclosures reduce the information asymmetry of the firm’s
environmental initiatives between insiders and outsiders (Cormier et al., 2011). According to
Bullough and Johnson (1995) and Stanwick and Stanwick (2000), environmental disclosures areclassified into the following three types: 1) a formal statement explaining the firm’s corporate
environmental policy; 2) a qualitative and quantitative description of the type of environmental
initiatives implemented by the firm to show its environmental commitment; and 3) a combination of1) and 2). The content of environmental disclosures is generally in accordance with theenvironmental reporting guidelines of programs such as the Global Reporting Initiative (GRI) in
recent years, but what is included is fundamentally at the discretion of each firm. Thus,
environmental disclosures have remained predominantly a voluntary practice (Wilmshurst and Frost,2000). Although environmental disclosures include not only positive information including fewer
emissions, use of recycled materials, or certification of products or processes, but also negative
information including polluting events, or suits and fines related to violations of environmental
regulations (Philippe and Durand, 2011), environmental disclosures are also used to offset or
mitigate the negative impact of actual environmental performance (Patten, 2002).
The perspectives to be applied to environmental disclosures can be classified into three broad
study groups: decision usefulness studies, economic theory studies, and social and political theory6

studies (Gray et al., 1995). Stakeholder theory, legitimacy theory, and political economy theory thatare classified into social and political theory studies are most widely employed in the studies ofsocial and environmental accounting. Note that these three types of qualitative theories (stakeholder
theory, legitimacy theory and political economy theory) are not completely different from each other,as all three focus attention on the relationship between the organization and its operating
environment (Joshi and Gao, 2008; Neu et al., 2008).
The application of these theories depends on the study’s purpose. Because the main medium forenvironmental disclosures in Japanese firms, the target of this study, has been the independent
environmental report 1 that provides useful information to influence (multi) stakeholder decisions
and facilitates environmental communication (Japanese Ministry of the Environment, 2007),
stakeholder theory is the appropriate theoretical perspective for this issue 2 . Indeed, 71.1% ofJapanese listed firms published independent environmental reports in 2012 (Japanese Ministry of theEnvironment, 2014). Stakeholder theory suggests that a firm’s continued existence requires the
support of the stakeholders 3 and their approval must be sought and the activities of the firm adjusted
to gain that approval (Gray et al., 1995; Joshi and Gao, 2008). Thus, the management of different
stakeholder groups in society is critically important for the survival of the organization (Deegan,2000). If environmental initiatives are viewed as an effective management strategy for dealing withstakeholders, a positive relationship between stakeholder power, environmental initiatives, andenvironmental disclosures is expected, because the more powerful the stakeholders, the more thefirm must adapt (Gray et al., 1995; Roberts, 1992). In short, because firms adopt an active strategic
posture that seeks to influence their relationship with important stakeholders, or a passive posturethat is neither involved in continuous monitoring activities of stakeholders nor deliberately searchingfor an optimal stakeholder strategy, an active (passive) strategic posture would lead to high (low)levels of environmental initiatives and environmental disclosures (Joshi and Gao, 2008; Ullmann,
1985).
In the case of environmental disclosure in Japanese firms, previous studies found that consumers
and stockholders/investors are generally the most important stakeholder groups for environmental

1“Environmental reports” in this study include the so-called sustainability reports, corporate social

responsibility (CSR) reports, etc.
2

Legitimacy theory is an appropriate theoretical perspective to analyze environmental disclosuresof US and EU firms whose main medium is the annual report that provides financial informationinfluencing stockholder/investor decisions. This theory focuses on the nature of organizational
legitimation activities.
3

According to Freeman (1984), a stakeholder is defined as any group or individual who can affect oris affected by the achievement of a firm’s objectives.
7

initiatives and disclosures (e.g. Higashida et al., 2005; Kokubu and Hirayama, 2004; Kokubu et al.,2012, 2002; Park, 1999). This suggests that Japanese firms regard consumers andstockholders/investors as important stakeholders regarding environmental issues for their survival.
Given that, it is suspected that Japanese firms expect higher economic performance such as financial
performance and stock returns from the environmental disclosures because higher economic
performance is key for the survival of the firm. That is, it is possible that firms attempt to satisfy
consumers and stockholders/investors as their important stakeholders in order to enhance theireconomic performance for their survival, because important stakeholders’ environmental preferences
influence their economic performance (Nishitani, 2009). It seems that this assumption does notconflict with stakeholder theory. However, because the empirical studies using stakeholder theory
proved that a firm’s important stakeholders such as consumers and stockholders/investors influence
its survival by clarifying the influence of important stakeholders on environmental disclosures, few
studies have analyzed the influence of a firm’s environmental disclosures on its economic
performance directly.
Accordingly, the above discussions of stakeholder theory used in studies of social andenvironmental accounting support the possibility that environmental disclosures play an importantrole in the influence of environmental initiatives through an increase in demand on economic
performance, and suggest a need to consider the role of environmental disclosures when analyzing
the relationship between environmental initiatives and economic performance, especially forJapanese firms.

4. ModelThis section presents a simple theoretical model specified originally by Nishitani (2011) to analyze
how a firm’s environmental initiatives and environmental disclosures influence its economic
performance. Economic performance in this study is measured by value added, which is total
revenue minus material cost. The value added consists of profits and wages.
The regression model to estimate the influences of environmental initiatives and environmental
disclosures on value added is derived from a Cobb–Douglas production function and an inverse
demand function.
The Cobb–Douglas production function with labor, capital, and materials for firm i is:

X i = Ai Lαi K iβ M i1−α − β ,(1)where X is output, L is labor, K is capital, M is materials, A is total factor productivity,
0 < α < 1 , 0 < β < 1 , and 0 < α + β < 1 . We assume constant returns to scale in production.

8Given total revenue Yi = pi X i where p is the price of output, labor cost Wi = wLi where w is
the wage rate, capital cost Ri = rK i where r is the implicit rental rate of capital, and materials cost

Qi = qM i where q is the price of materials, it follows that:αβYiW   R   Q = Ai  i   i   i pi w  r   q 

1 −α − β.

(2)The inverse demand function:pi = ai X i−γ(3)yields the price 4, and then total revenue is expressed as follows:1− γ  W α  R  β  Q 1−α − β 
Yi = ai  Ai  i   i   i   w   r   q 

α −αγ

W 
= ai Ai1−γ  i w Ri   r β − βγ Qi   q 

1−α − β −γ +αγ + βγ,

(4)where 1 − γ > 0 . Accordingly, value added is:
α −αγ

W 
Yi − Qi = ai Ai1−γ  i  w

Because Ri   r β − βγ Qi   q 

1−α − β − γ +αγ + βγ

− Qi .

(5)Yi − Qi
is the ratio of value added to capital cost, equation (5) is transformed into:
Ri

α −αγ

Yi
W 
= ai Ai1−γ  i Riw

1−α − β −γ +αγ + βγ

Riβ −βγ −1  Qi  r β −βγ  q .

(6)

Suppose that Ai is a function describing the environmental initiatives through an improvement inproductivity Env and ai is that describing environmental initiatives through an increase indemand, in other words environmental disclosures, Disc , and they are described as:

4

We assume that parameter a is replaced by ai .

9

Ai = eδ(0 ) + δ (1 ) Env

,

i

(7)

where δ (1) > 0 is the influence of the environmental initiatives that occurs through an improvementin productivity, and:ai = eω(0 ) + ω (1 ) Disc

i

,

(8)

where ω (1) > 0 is the influence of the environmental disclosures that occurs through an increase indemand.

Taking logarithms of both sides of equation (6) and substituting equations (7) and (8) yields:lnYi= (α − αγ )ln Wi + (β − βγ − 1)ln Ri + (1 − α − β − γ + αγ + βγ )ln Qi
Ri+ (1 − γ )δ (1)Envi + ω (1)Disci + (1 − γ )δ (0 ) + ω (0 ) − (α − αγ )ln w− (β − βγ )ln r − (1 − α − β − γ + αλ + βγ )ln q .

(9)Equation (9) indicates that the environmental initiatives and environmental disclosures influence afirm’s value added (the ratio of value added over capital cost) through an improvement in productivity
and an increase in demand, respectively. Consequently, equation (9) with an error term is theregression model for estimating the parameter of the environmental initiatives(1 − γ )δ (1) andenvironmental disclosures ω (1) , where(1 − γ )δ (0 ) + ω (0 ) − (α − αγ )ln w − (β − βγ )ln r − (1 − α − β − γ + αλ + βγ )ln q is the constant term.
Although the parameter for the influence of environmental initiatives through improvement inproductivity δ (1) cannot be estimated directly, it is calculated from the estimated parameters
because γ can be obtained by solving the following equations: (α − αγ ) = B1 , (β − βγ − 1) = B2 , and(1 − α − β − γ + αγ + βγ ) = B3 .
According to the model specifications (namely, 0 < α < 1 , 0 < β < 1 , ω (1) > 0 , δ (1) > 0 , and
1 − γ > 0 ), the predicted signs of these parameters are positive for (α − αγ ) , (1 − α − β − γ + αγ + βγ ) ,ω (1) , and (1 − γ )δ (1) , and negative for (β − βγ − 1) .

5. Data
We used panel data on 196 Japanese manufacturing firms (in the food, textiles, pulp and paper,
chemicals, pharmaceuticals, petroleum, rubber, glass, steel, nonferrous metals, metals, generalmachinery, electrical appliances, transportation machinery, precision instruments, and other10

manufacturing industries) listed on the first and second sections of the Tokyo Stock Exchange from2010 to 2012 to estimate the parameters in equation (9). Holding companies are not included in thesample. The total number of firm-year observations is 524 because of the use of an unbalanced panelof data. The descriptive statistics of the dependent and independent variables are given in Table 2, andthey are defined as follows.
The dependent variable is the logarithm of net sales over the book value of tangible fixed assets
proxying for ln

Y. The independent variables are the logarithm of wages proxying for ln W , theRlogarithm of the book value of tangible fixed assets for ln R , the logarithm of raw materials expense
for ln Q , the environmental initiatives score evaluated by Toyo Keizai Inc. for Env , and ESG(Environment, Society, and Governance) disclosures score evaluated by Bloomberg for Disc .
In regard to the proxy for Env , Toyo Keizai Inc. evaluates and scores the CSR (corporate social
responsibility) initiatives of approximately 1,200 Japanese listed and nonlisted firms based on thequestionnaire surveys since 2005, and it publishes the evaluated scores in several specific areas
including the environmental initiatives area of the highest ranked firms (500 firms in 2010, and 700
firms in 2011 and 2012). Because the environmental initiatives score suggests the level ofenvironmental initiatives of firms despite third party evaluation, it is appropriate to use the score as
the proxy for Env not Disc .
In regard to the proxy for Disc , Bloomberg collects firm’s ESG data in a fashion unique tothemselves, and evaluates each ESG initiative, and then publishes its standardized values. ESG
disclosure scores regarding a firm’s disclosure initiatives is one of these evaluated values. Although
we use ESG disclosure scores that are aggregated scores of the environment, society, and governancebecause of data availability, environmental disclosures are the major disclosures among ESG
disclosures for many Japanese firms. ESG disclosure scores are also the score evaluated by a third
party, as previous studies employed. However, this is the score of environmental (ESG) disclosures,
not that of environmental initiatives, which directly focuses on disclosures. For example, Nishitani etal. (2011), who analyzed the influence on a firm’s value added of a reduction of pollution emissions
by improving productivity and increasing demand, employed a score based on the actual pollution
reduction rate as a proxy for improving productivity, and the score derived from the chemicalmaterial emissions management rank evaluated by Nikkei Environmental Management Survey as aproxy for reduction of pollution emissions through increasing demand. The chemical material
emissions management rank could more or less depend on the disclosed information by the firm.
Thus, ESG disclosure scores are more direct and more preferable as a proxy for environmental
initiatives through an increase in demand.

11

Because environmental disclosures are not a component of the environmental initiatives score, theenvironmental initiatives score and ESG disclosures score are independent, and they are notnecessarily proportional. Indeed, their correlation is only 0.0852.
The data for all variables except Env and Disc are taken from the Nikkei Economic Electronic
Databank System. The data for the environmental initiatives score are from the Toyo Keizai CSR
Survey and those for the ESG disclosures score are from the Bloomberg database. All financial
values are deflated using the GDP deflator.

(Tables 2)

6. Estimation results
Table 3 shows the estimation results. Models (1) to (3) in the table are estimated using a fixed
effects instrumental variables (FE-IV) model, which uses the logarithm of the book value of tangible
fixed assets in t–1 as the instrumental variable, to avoid endogeneity bias derived from thetheoretical model (equation (9)). Year dummies are additionally included in the estimation models to
capture the influence of macroeconomic shocks. The Hausman test, supplemented by Sargan–
Hansen test statistics, suggests that the FE-IV models are more reliable than the random effects
instrumental variables models (RE-IV) in all models.
In Models (1) to (3), the logarithm of wages and logarithm of raw materials expense are
significantly positive, and the logarithm of the book value of tangible fixed assets is significantly
negative. They are consistent with the predicted values in the theoretical model, which suggests that

γ is significant as well. According to the calculations, γ = 0.4903, 0.4954, and 0.5235 in Models(1) to (3), respectively.
Model (1) includes only the environmental initiatives score. The coefficient of the environmental
initiatives score is 0.0015 and is statistically significant. Accordingly,δ (1) = 0.0029


0.0015  = . Because the dependent variable is the logarithm of net sales over the book value (1 − 0.4903) of tangible fixed assets, the (marginal) effect on the logarithm of net sales over the book value oftangible fixed assets of the environmental initiatives score can be calculated using the parameter
exponent. Accordingly, a firm that implements environmental initiatives enhances its value added by
2.94% (per 1 point of the environmental initiatives score) through an improvement in productivity.
Model (2) adds ESG disclosures score in Model (1). This is to estimate the influence ofenvironmental initiatives through an increase in demand, given the influence through an
improvement in productivity. The coefficient of the environmental initiatives score is 0.0015 and is
statistically significant. Thus, δ (1) = 0.0030. This value is almost equivalent to that in Model (1).
The coefficient of the ESG disclosure score is 0.0013 and is statistically significant as well. The
12

results in Models (1) and (2) suggest that it does not mean that the influence through an
improvement in productivity in Model (1) will be divided into the influence through an improvementin productivity and through an increase in demand in Model (2). Thus, the estimations that focus
only on the influence of environmental initiatives through an improvement in productivity will
underestimate the total influence of a firm’s implementation of environmental initiatives on its value
added. Accordingly, a firm that implements environmental initiatives enhances its value added by
1.30% (per 1 point of the ESG disclosures score) through an increase in demand, in addition to
2.98% through an improvement in productivity. Note that these influences through an improvementin productivity and an increase in demand are not comparable directly because the standard to scorethe point is different between the environmental initiatives score and ESG disclosures score.
Model (3) includes the interaction term of the environmental initiatives score and B-to-C dummy,that of the environmental initiatives score and B-to-B dummy, that of the ESG disclosures score andB-to-C dummy, and that of the ESG disclosures score and B-to-B dummy, instead of theenvironmental initiatives score and ESG disclosures score. This is to additionally analyze theinfluence of the ESG disclosures score on value added for the B-to-C firms and that for B-to-B firms,
to confirm whether the influence of environmental initiatives through an increase in demand isdifferent between final consumers and business consumers, given that previous studies in social andenvironmental accounting suggest that consumers are one of the important stakeholders for Japanesefirms to disclose environmental information. The classification of B-to-C firms or B-to-B firms forthe analysis depends on the advertising expenditure ratio (advertising expenditure divided by net
sales), because B-to-C firms who are close to final consumers are expected to be more likely toundertake advertising expenditure. Then, this study assumed, for convenience, firms whose
advertising expenditure ratio is equal to or greater than the value of the 75th percentile of samples of
B-to-C firms and those whose advertising expenditure ratio is lower than the value of the 75th
percentile of samples of B-to-B firms. The influences of the environmental initiatives score for
B-to-C and B-to-B firms are estimated as well. The coefficient of the interaction term of theenvironmental initiatives score and B-to-C dummy is 0.0022 and that of the interaction term of theenvironmental initiatives score and B-to-B dummy is 0.0014; and they are statistically significant.
On the other hand, the coefficient of the interaction term of the ESG disclosures score and B-to-C
dummy is 0.0030 and that of the interaction term of the ESG disclosures score and B-to-B dummy is
0.0004; however, only the former is statistically significant. Accordingly, a B-to-C firm that
implements environmental initiatives enhances its value added by 4.63% through an improvement inproductivity and 3.01% through an increase in demand, and a B-to-B firm that implements
environmental initiatives enhances its value added by 2.94% through an improvement in productivity.
However, although the influences of environmental initiatives through an improvement inproductivity are statistically different between B-to-C and B-to-B firms, those influences through an
13

increase in demand are not. Thus, the influence of environmental initiatives through an increase indemand does not differ so much between B-to-C and B-to-B firms, nevertheless specific values forthem are observed or not.
In summary, because a firm that implements environmental initiatives is more likely to enhance its
value added through an improvement in productivity and an increase in demand, estimation focusing
only on the former will underestimate the total influence of implementation of environmental
initiatives. Besides, although the influence of implementation of environmental initiatives through anincrease in demand is only observed for B-to-C firms, the influence for B-to-C firms is notstatistically different from that for B-to-B firms.

(Table 3)

7. Conclusion and implications
This study empirically analyzed the influence of a firm’s environmental initiatives on its economic
performance taking into account the role of environmental disclosures, based on a theoretical model
derived from a Cobb–Douglas production function and an inverse demand function. The main
findings using panel data on Japanese manufacturing firms and their relevant implications are as
follows.
First, a firm that implements environmental initiatives more proactively is more likely to enhance
economic performance through an improvement in productivity, even if the influence of theenvironmental initiatives through an increase in demand is not considered. This suggests thatenvironmental initiatives will enhance a firm’s economic performance even only through an
improvement in productivity. For example, this could occur by a shift from end-of-pipe technologies
to a cleaner production approach (Baas, 1995; Nishitani et al., 2011). Then, firms can reducematerial and energy inputs, which lead to cost reduction, as well as environmental impacts such aspollution and GHG emissions reductions. Furthermore, the employment of evaluation tools such as
material flow cost accounting, a method for environmental management accounting, is helpful forthese reductions (Kokubu, 2010). However, an individual firm’s environmental initiatives have alimited influence in reducing them, because the environmental impacts and material and energy
inputs associated with the production of a product depend not only on the product manufacturer, butalso across the entire supply chain. Thus, it is possible that green supply chain management (GSCM),
environmental initiatives in cooperation with suppliers, that concern not only traditional
management performance including timeliness, transaction cost, product quality, and effective
communication, but also environmental initiatives, function effectively as well (Faruk et al., 2002).
For example, in the case of GSCM intending to reduce GHG, the carbon footprint and Scope 3 of the
GHG Protocol are the specific methods of GSCM and the number of firms implementing GSCM
14

using these methods is increasing (Kajiwara and Kokubu, 2012). Therefore, a firm can enhance its
economic performance by performing these specific environmental initiatives effectively.
Second, a firm that implements environmental initiatives more proactively is more likely toenhance economic performance through an improvement in productivity and an increase in demand
if the influences of the environmental initiatives through both paths are simultaneously considered.
This supports the importance of considering the influence of environmental initiatives through anincrease in demand and the role of environmental disclosures, when analyzing the relationshipbetween environmental initiatives and economic performance. The result is consistent with thestudies of social and environmental accounting that revealed that consumers are one of the mostimportant stakeholders for environmental disclosures. Accordingly, a firm that satisfies its customers
by disclosing environmental information can enhance its economic performance through an increasein demand, which is key for the survival of the firm. It is important to find that the magnitude of theinfluence of environmental initiatives through an improvement in productivity is almost equivalent,either with or without considering the influence of the environmental initiatives through an increasein demand. Thus, because the total influence of environmental initiatives includes not only the
influence through an improvement in productivity but also the influence through an increase indemand, estimation focusing only on the influence of environmental initiatives through an
improvement in productivity will underestimate the total influence of environmental initiatives.
Furthermore, these results are suggestive for the business practice of environmental disclosures aswell. This is because there is a global movement of environmental disclosures towards “integrated
reporting” that unifies financial and nonfinancial information needed for investment decisions (IIRC,
2013; Jensen and Berg, 2012). Because stockholders/investors are target readers of integrated
reporting, the movement implies that firms will be required to disclose environmental informationthat mainly satisfies stockholders/investors. Given that, consumers may be regarded as secondary
stakeholders or less important stakeholders of a firm’s environmental disclosures, at this rate.
However, our estimation results create a stir in such situations. That is, environmental disclosures
only targeting stockholders/investors are not enough for a firm’s survival, and environmental
disclosures targeting consumers are also necessary for survival. Thus, environmental disclosures bymeans of not only integrated reports but also environmental reports would be preferable. Even so,
because a higher quality of the information will be required because of for example the impact of the
GRI’s G4 Sustainability Reporting Guidelines (GRI, 2013), it is necessary to analyze the role ofenvironmental disclosures on the relationship between environmental initiatives and economic
performance in terms of the quality of the information in future research. Such studies will be
important in clarifying the issue of greenwashing as well.
Third, a B-to-C firm that implements environmental initiatives more proactively is more likely toenhance economic performance through both an improvement in productivity and an increase in15

demand, whereas a B-to-B firm that implements environmental initiatives more proactively is more
likely to enhance economic performance through only an improvement in productivity. The
influence of environmental initiatives through an improvement in productivity is observed for both
B-to-C and B-to-B firms. This implies that the specific environmental initiatives function effectively
for both firms. However, the influence for B-to-C firms is greater than that for B-to-B firms. This
could be because, as Nishitani (2011) suggests, B-to-C firms consist of many assemblers, and it iseasier for them to improve environmental performance and productivity simultaneously, for example,
by partially reforming a complicated manufacturing process. In addition, because they implemented
a comprehensive environmental management system earlier, they could acquire a first-mover’s
advantage from their improved productivity (Nishitani, 2011). Furthermore, given this, GSCM for
B-to-C could function more effectively. On the other hand, the influence of environmental initiatives
through an increase in demand is only observed in B-to-C firms. However, the influence is notstatistically different between B-to-C and B-to-B firms whereas its specific value for B-to-B firms is
not observed. It is possible that they imply that the influences of final consumers and businessconsumers for a firm are in the transition stage. This is because Kokubu et al. (2012) suggested thepossibility that the influence of final consumers on environmental disclosures in Japanese firms has
decreased, based on comparisons with their findings and previous research findings. This implies
that the environmental disclosures have been becoming important for not only B-to-C firms but also
B-to-B firms. Therefore, our finding is at least consistent with Kokubu et al.’s (2012) suggestion.
Besides, because information sharing between suppliers and customers is necessary for GSCM, ourfinding is reasonable at this point as well. If a firm does business with only small numbers ofcustomers, its environmental information will be disclosed to these customers individually. However,if the firm does business with large numbers of customers, its environmental information will be
disclosed publicly by, for example, an environmental report.
Thus, our empirical analyses found that a firm’s environmental initiatives will enhance its
economic performance through an improvement in productivity and an increase in demand, andsupported the view that environmental disclosures play an important role for the latter influence.
Accordingly, although environmental initiatives will enhance economic performance, it is notenough for firms to only implement environmental initiatives, it is also important for firms todisclose environmental information to the public.

Acknowledgements
This paper forms part of the result of the research supported by the Grant-in-Aids for Scientific
Research (C) 24530561 from the Ministry of Education, Culture, Sports, Science, and Technology,
Japan.

16

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Table 1 Literature analyzing the relationship between environmental initiatives/performances andeconomic performances
F/S

Literature

SampleMethodInfluences of

Economic

environmental

performance

initiatives/
performances
S

Hamilton (1995)

436 US firms in 1989

Event study

Toxic Release

Abnormal returns

Inventory
announcements (–)
S

Klassen and

96 US firms during

McLaughlin (1996)

1989–1990

Event study

Winning

Stock returns

environmental awards
(+)

F

S

Hart and Ahuja

127 US(1996)

manufacturing firms

substance emissions

during 1989–1992

reduction (+)

Yamashita et al.

26 US firms in 1993

OLS

Event study(1999)

Total chemical

Environmental

ROA; ROS; ROE

Stock returns

conscientiousness
scores in Fortune
magazine (+)

F

Russo and Fouts

243 firms assigned(1997)

environmental ratings

OLS

Environmental rating

ROA

scores by FRDC (+)

by the Franklin
Research andDevelopment
Corporation (FRDC)
during 1991–1992
S

Dowell et al. (2000)

89 US firms during

Interval regression

Adoption of stricter

1994–1997

analysisenvironmental

Tobin’s q

standards at a global
level (+)
S

Konar and Cohen

321 US firms in 1989

OLS

(2001)F

Sarkis and Cordeiro(2001)

Poor environmental

Tobin’s q–1

management (–)
482 US firms in 1993

OLS

Pollution prevention
approach (–);
end-of-pipe approach
(–)

ROS

S

Thomas (2001)

291 UK firms during

OLS

1985–1997

Adoption of an

Excess returns

environmental policy(+); prosecution forbreach ofenvironmental
standards (–)

F/SKing and Lenox

614 US(2002)

manufacturing firms

Fixed effects model

Pollution prevention

ROA; Tobin’s q(+)

during 1991–1996
F

Zhu and Sarkis

186 Chinese

HierarchicalGreen supply chain

Economic(2004)

manufacturing firms

regression

management

performance

practices (+/–)

indicators

Environmental

Abnormal returns

during 2002–2003
S

Gupta and Goldar

50 Indian firms in(2005)

pulp and paper,

rating given by

automobile andIndia’s leading

chlor-alkali industries

environmental NGO,

in 1999, 2001 or 2002

the Delhi-based

Event study

Centre for Scienceand Environment (+)
F

Darnall et al. (2007)

4,200 manufacturing

Bivariate probit

Decrease in

Profitability; sales

facilities in Canada,model

wastewater effluent

volumeFrance, Germany,(+); decrease in air

Hungary, Japan,

pollution (+);

Norway, and US in

decrease in global

2003

pollutants (e.g.
greenhouse gas) (+)

S

Nakao et al. (2007)

121 Japanese firms

OLS

during 2002–2003

Nikkei Corporate

Tobin’s q–1

Environmental
Management score

S

S

Ziegler et al. (2007)

Yamaguchi (2008)

212 European firms

Time-series

An industry’s averageduring 1996–2001

regressions of asset

environmental

pricing models

performance

Event study

Nikkei Corporate

69 Japanese firms
during 1998–2006

Stock returns

Stock prices

Environmental
Management score

S

Jacobs et al. (2010)

340 US firms during

Event study

Announcements ofAbnormal returns

2004–2006

philanthropic
gifts forenvironmental causes(+); ISO 14001
certifications (+);
voluntary emission
reductions (–)

F

F/SHeras-Saizarbitoria et

196 Spanish firms

Multivariate panel

ISO 14001

al. (2011)

during 2000–2005

data analysis

certification (+)

Iwata and Okada

Japanese

Industry-specific

Reduction of

ROA; ROI; ROIC;(2011)

manufacturing firms

fixed effects model

greenhouse gas

Tobin’s q–1

during 2004–2008
F

Nishitani (2011)

ROA; sales volume

emissions (+)

871 Japanese

Fixed effects

Implementation of an

manufacturing firms

instrumental variables

environmental

during 1996–2007

model

management system

Value added

(+)
F

F

Nishitani et al. (2011)

426 JapaneseRandom effects

Reduction of

manufacturing firms

instrumental variables

pollution emissions

during 2002–2008

model

(+)

Hatakeda et al.

1,089 Japanese

Switching regression

Less GHG emissions(2012)

manufacturing firms

model

(–)

Value added

ROA

in 2007
S

F

Nishitani and Kokubu

641 JapaneseRandom effects

Carbon dioxide(2012)

manufacturing firms

instrumental variables

productivity (+)

during 2006–2008

model

Thoumy and Vachon

79 environmental

OLS(2012)

Tobin’s q

Pollution prevention

Profitability index;

projects that took

technologies (–);

internal rate of returnplace in Canadianenvironmental

manufacturing firms

projects related to theduring 2001–2009

main product (+);
environmental projectsize (–)

Fde Burgos-Jime´nez

186 Welsh firms

et al. (2013)

during 2003–2004

OLS

Environmental
proactivity (+);
environmental
performance (+)

ROA; ROSF

Qi et al. (2014)

39 Chinese industrial

Dynamic generalized

SO2 emissions per

sectors during 1990–

method of moments

unit of industry value

2010

instrumental variables

added (+)

Industry-level ROA

model
F

Nishitani et al. (2014)

423 JapaneseRandom effects

GHG emissions

manufacturing firms

instrumental variables

management (+)

during 2007–2008

model

Value added

Note: F means financial performance and S means stock market performance. OLS means ordinary least squares. ROA means returnon assets, ROS means return on sales, ROE means return on equities, ROI means return on investment, and ROIC means return on
invested capital.

Table 2 Descriptive statistics
Observations
Logarithm of net sales over the book value of tangible fixed assets

Logarithm of wage expense
Logarithm of the book value of tangible fixed assets

Logarithm of raw materials expense
Environmental initiatives score
ESG disclosures score
B-to-C
B-to-B
Logarithm of the book value of tangible fixed assets (t–1)

Year 2010
Year 2011
Year 2012

524
524
524
524
524
524
524
524
524
524
524
524

Mean
1.38939.8837
10.6885
10.7895
73.8563
8.58310.25000.750010.7162
0.26910.37020.3607

S.D.
0.6156
1.1045
1.21481.597515.4734
13.2794
0.43340.43341.22730.44390.48330.4807Min
0.13937.70226.68263.823820
1.2397006.6826000Max4.460412.7981
13.5271
14.6916100
52.06611
1
13.63211
1
1

Table 3 Estimation results

Logarithm of wage expense
Logarithm of the book value of tangible fixed assets

Logarithm of raw materials expense
Environmental initiatives score
×B-to-C
×B-to-B
ESG disclosures score

(1)
FE-IV
0.4771 ***(0.0854)-1.0427 ***(0.1577)0.0753 ***(0.0204)
0.0015 *(0.0009)-

×B-to-C-

×B-to-B-

Year 2011
Year 2012
Centered R2
Endogeneity test
Hausman test (p-value)
Under-identification test (p-value)
Weak-identification test (F-value)
Observations-0.0203 **(0.0095)-0.0276 ***(0.0100)
0.52750.09040.00060.000022.3690
524

(2)
FE-IV
0.4840 ***(0.0853)-1.0550 ***(0.1571)
0.0756 ***(0.0204)
0.0015 *(0.0009)
0.0013 *(0.0007)-0.0173 *(0.0098)-0.0243 **(0.0103)
0.52670.06970.00030.000022.5590
524

(3)
FE-IV
0.4716 ***(0.0846)-1.0703 ***(0.1580)
0.0752 ***(0.0204)
0.0022 **(0.0010)0.0014 * †(0.0008)
0.0030 **(0.0014)0.0004(0.0008)-0.0186 *(0.0098)-0.0258 **(0.0103)0.53000.05940.00040.000022.0490524

Note 1: Standard errors are shown in parentheses.
Note 2: ***, ** and * implies that the coefficient is significantly different from zero at the 1, 5, and 10% levels, respectively.
Note 3: † implies that the coefficient of the interaction term between Env and B-to-B is significantly different from that between
Env and B-to-C at the 10% level.
Note 4: The Stock–Yogo critical values for the weak identification test at 10% relative IV bias are 16.38.