Determinants and consequences of environmental investment: an empirical study of Indonesian firms

Date08 July 2019
Published date08 July 2019
AuthorAnis Chariri,Mohammad Nasir,Indira Januarti,Daljono Daljono
Determinants and consequences of
environmental investment: an empirical
study of Indonesian rms
Anis Chariri, Mohammad Nasir, Indira Januarti and Daljono Daljono
Purpose This study aims to examinethe effect of institutional ownership, audit committeeand types of
industry on environmental investment. Furthermore, this research investigates the consequences of
environmentalinvestments on firm financial performance.
Design/methodology/approach The sample consisted of 145 companies listed on the Indonesia
Stock Exchanges and receiving PROPER awards issued by the Ministry of Environment, Republic of
Indonesia in the year 2009-2015. The data were then analyzed using ordinal logistic regression and
Findings The findings showed that environmental investment was significantly affected by types of
industry. However, institutional ownership and audit committee did not influence environmental
investment. Finally,the finding indicated that environmentalinvestments positively affected firm financial
Research limitations/implications This research only covered companies listed on the Indonesia
Stock Exchanges and receiving PROPER awards. Thus, the findings cannot be generalized for all
companiesin Indonesia and other markets.
Originality/value This study is the first effort intended to investigate the determinants and
consequences of environmentalinvestment which have been ignored by previous studies,especially in
the Asianemerging markets. This study at leastprovides us with two main contributions.First, the findings
on determinantsof environmental investment can be used by governmentsin Asian countries, especially
Indonesia as a reference in making policies concerning the obligations of companies to the
environmental problems. Second, the finding on the relationship of environmental investment and
financial performancecan be used by companies as strategies to generateprofits without destroying the
Keywords Institutional ownership, Audit committee, Environmental investment,PROPER,
Types of industry, Company size, Firm performance,Ownership
Paper type Research paper
1. Introduction
In the past decade, organizations have changed their business paradigm. In fact,
companies no longer see profit as their main orientation of doing business, but they have
shifted their focus on profit, people and planet (3P). Public awareness on environmental
issues has also forced companies to consider problemsof pollution, resources, waste, and
other environmental and social issues as parts pf their business (Gray et al.,2001;Gray
et al., 1995). As a consequence, companies have focuses their strategic decisions on
environmental investments.
Environmental investmentcan be seen as company efforts in environmental managementto
reduce the negative impacts of firm activities on the environment (Berliner and Prakash,
2013;Minatti Ferreira, et al.,2014;Testa et al.,2015). Indeed, companies have considered
Anis Chariri,
Mohammad Nasir,
Indira Januarti and
Daljono Daljono are all
based at the Faculty of
Economics and Business,
Universitas Diponegoro,
Semarang, Indonesia.
Received 1 May 2017
Revised 27 November 2017
2 April 2018
Accepted 23 April 2018
DOI 10.1108/JABS-05-2017-0061 VOL. 13 NO. 3 2019,pp. 433-449, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 433
a special fund for doing green management so as the companies can minimize the use of
energy and carbon emissions. Environmental investment is believed as an appropriate
strategy to improve company reputation in the eyes of stakeholders, and ultimately can
increase competitive advantages and firm values (Bagur-Femenı
´as et al.,2015;Bonifant
et al.,1995
). The awareness of companies in dealing with environmental issues can be
related to the environmental condition,which tends to decrease gradually. In fact, a number
of countries suffer from environmentalproblems, including Asian countries.
In the Indonesia arena, for example, the public have witnessed a number of environmental
problems such as deforestation, peat lands degradation, and slash-and-burn agriculture,
which together accounts for 80 per cent of Indonesia’s carbon dioxide emissions (reported
by Time July 12, 2007). This makes Indonesia the world’s 16th largest greenhouse gas
emitter (reported by The Guardian, January 11, 2011). Unfortunately, manufacturing
companies are growing at over 10 per cent annually, and the Indonesian Government
recognizes the mounting risk of severe pollution damage (Makarim et al., 1995). The
environmental problems haveled to environmental movement. In fact, environmental issues
have also attracted groups, including religious and spiritual groups in Indonesia to get
actively involved in the global environmental movement’s campaign for environmental
sustainability (Reuter,2015).
Under the conditions, thus, the Ministry of Environment Republic of Indonesia has decided
to release a number of environmental policies, including a large-scale public disclosure
program, which may induce significant pollution abatement. In June 1995, the Ministry of
Environment launched an innovative program for public disclosure of polluters’
environmental performance.This initiative—well known as the Program for Pollution Control,
Evaluation and Rating (PROPER)—is expected to serve two main objectives: to promote
compliance with existing regulations and to reward firms whose performance exceeds
regulatory standards (Makarim et al., 1995). This program has forced companies,
especially those which are sensitive to environmental issues to implement PROPER as part
of their responsibility for solving the issues. Consequently, a number of companies that are
committed to environmental investment tend to increase yearly. As reported by the Ministry
of Environment Republic of Indonesia, the number of companies implementing PROPER
increased from 85 in 2002/2003 to 1,317in 2011/2012 (Ministry of Environment, 2012).
However, the involvement of companies in PROPER awards is still voluntary. Hence, only
companies with environmentalinvestment will be eager to apply for the PROPER awards. In
other words, the achievement of a company to win PROPER awards can be seen as how
serious is the company in investing their money on environmental issues. In fact, the
indicators used in PROPER award are consistent with the concept of environmental
investment, in which the implementation of PROPER requires companies to invest money in
environmental programs for the purpose of getting rewards. Moreover, the voluntary
implementation of PROPER implies that environmental investment can be influenced by
unique characteristics ofthe companies (Hrovatin et al.,2016).
The awareness of companies on the environment issues has also attracted business
scholars to conduct empirical research with different perspectives. In fact, a number of
studies on environmental issues have been conducted in some developed countries.
However, such studies are more concerned with environmental disclosures (Banasik et al.,
2010;Barbu et al.,2014;Iatridis, 2013;Cho et al.,2012;Hackston and Milne, 1996)and
environmental performance (Sun et al., 2012;Wahba, 2010;Rokhmawati et al.,2015). In
regard to environmental investment, Nakamura’s (2014) study showed that every company
had different environmental performance due to differences in the characteristics of
organization and industry. Other studies on environmental investment have also been
conducted by several scholars (Jansson and Biel, 2011;Power et al.,2015;Krishnamoorthy
et al.,2008
;Sueyoshi and Goto, 2009;Banasik et al.,2010;Testa et al.,2015).
Unfortunately, such studies areconcentrated on the impact of environmental investment on

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