We empirically investigate the relationship between environmental management and economic performance using such data as environmental rating, credit rating, and accumulated earnings ratio of companies listed in the manufacturing sector on the first section of the Tokyo Stock Exchange. We performed a path analysis using two types of structural equation modeling: Model A with a terminal economic performance path and Model B with a terminal environmental management path. As a result, we found that Model B has better goodness of fit in the path analysis than does Model A. This is because it is natural to place the economic performance path before the environment management path since companies pursue profits for stockholders. We also confirmed that in Model B, the path from the accumulated earnings rate to environmental management has a significantly negative coefficient. This suggests that two groups of enterprises exist: profit-oriented and environment-oriented companies. Since our results are based on Japanese companies, it is advisable to investigate further to generalize the results worldwide.
Accumulated Earnings Ratio Environment Management Economic Performance Company Size Sustainable Management1. Introduction of a New Company Size Index4.1. Sales and Number of Employees as a Company Size Index
For Models A and B, using the two variables of sales and number of employees, we performed path analysis to environmental rating and credit rating with the other financial indicators as initial factors: the accumulated- earnings ratio, interest-bearing debt ratio, and cash flow. Then, we examined which measure of company size was a better index. Figure 3 shows the result of the path analysis for Model A-1 with the data from 2013. In the figure, the values shown by unidirectional arrows indicate standardized regression coefficients and the values shown by bidirectional arrows indicate correlation coefficients. Hereafter, these indications are also applied for other figures. The result shows that while sales have no significant influence on environmental rating, they have a positive influence on credit rating. On the other hand, number of employees has no significant influence
Table 1
. Numeric conversion of credit ratings
AAA
AA+
AA
AA−
A+
A
A−
BBB+
BBB
BBB−
Less than BB+
Value
10
9
8
7
6
5
4
3
2
1
0
Model A: Environmental rating is placed before credit rating
Model B: Credit rating is placed before environmental rating
Model A-1: Results from the data in 2013; (a) Fit measures: RMSEA = 0.029, GFI = 0.985, AGFI = 0.954, CFI = 0.998; (b) Squared multiple correlations (SMC): environmental rating (0.22), credit rating (0.60); (c) p < 0.05 (including p < 0.001 and p < 0.01)
on credit rating, but it has positive influence on environmental rating. It turned out that sales and number of employees have different influences on environmental rating and credit rating. Thus, sales and number of employ- ees cannot be considered the same variable having the same properties. Our other findings are as follows. The accumulated earnings ratio has significant positive influence on credit rating. The interest-bearing debt ratio and cash flow are not significant. Environmental rating was found to have significant influence on the credit rating. Figure 4 shows the results of Model B-1 using path analysis. We find that sales have significant positive influence only on credit rating, and number of employees has significant positive influence only on environmental ra- ting. Model B-1 is similar to Model A-1 with regard to influence of sales and number of employees on credit rating and environmental rating. Moreover, while the accumulated earnings ratio has significant influence on credit rating, it has significant negative influence on environmental rating. It is also verified that the interest-bearing
Model B-1: Results from the data in 2013. (a) Fit measures: RMSEA = 0.068, GFI = 0.982, AGFI = 0.932, CFI = 0.998; (b) SMC: environ- mental rating (0.54), credit rating (0.29); (c) p < 0.05 (including p < 0.001 and p < 0.01)
debt ratio and cash flow have no significant influence in Model B-1. Credit rating has significant positive influence on environmental rating.
From the results of Model A-1 and B-1, we find that sales and number of employees are inconsistent as an index of company size. Therefore, it is preferable to use another, better index that produces consistent results. In order to construct an effective index of company size, we propose to use the SICS [26] , which consists of a sum of the standardized sales and the standardized number of employees, and examine the SICS using path analysis. The SICS is defined as follows. Let and be sales and number of employees, respectively, for the i-th company. These values are standardized as
and (1)
where and are average values of sales and number of employees, respectively, and and are standard deviations of sales and number of employees, respectively. Using and, we define a new company index as
We call this the SICS.
4.2. Analysis Using SICS
Figure 5 and Figure 6 show the results of Models A-2 and B-2, respectively, with SICS. It is found that SICS has significant positive influence on both environmental rating and credit rating. The goodness of fit results are found to be RMSEA = 0.029 (Model A-1), RMSEA = 0.068 (Model B-1), RMSEA = 0.000 (Model A-2), and RMSEA = 0.000 (Model B-2). Thus, Models A-2 and B-2, which use SICS, have better goodness of fit results. Other fit indexes such as GFI, AGFI and CFI are also consistent with this. Therefore, SICS is considered to be more effective than other company size indexes. Hereafter, we use SICS as the company size index.
5. Comparison: Models A and B
In order to verify which model is more suitable to describe the relation mechanism of environmental management (environmental rating) and economic performance (credit rating), we performed the path analysis for
Model A-2: Results from the data in 2013. (a) Fit measures: RMSEA = 0.000, GFI = 0.994, AGFI = 0.970, CFI = 1.000; (b) SMC: environ- mental rating (0.20), credit rating (0.60); (c) p < 0.05 (including p < 0.001 and p < 0.01)
Model B-2: Results from the data in 2013. (a) Fit measures: RMSEA = 0.000, GFI = 0.999, AGFI = 0.986, CFI = 1.000; (b) SMC: credit rating (0.54), environmental rating (0.28); (c) p < 0.05 (including p < 0.001 and p < 0.01)
Models A and B using the data for each single fiscal year of the period 2010-2013. Furthermore, we also performed path analysis using the data for all four years (2010-2013). When we used all the data, the data for each index were standardized for each year. It turns out that the optimum paths obtained for each single fiscal year’s data and for the four-year data are the same path. Figure 7 and Figure 8 show the optimum paths obtained by the path analyses for Models A and B, respectively. The path coefficient signs are also indicated in the figures. The results of the path coefficients and the goodness of fit index are given in detail in Table 2 and Table 3.
First, let us consider Model A. In Model A (Figure 7), we find that SICS has significant positive influence on both environmental management (environmental rating) and economic performance (credit rating). This is in agreement with the results in Section 4, regardless of the fiscal year. Environmental management (environmental rating) has significant positive influence on economic performance (credit rating). The accumulated earnings ratio is not significant to environmental management (environmental rating), although significant positive influ-
Model A: Results of path analysis with the sign of path coefficients
Model B: Results of path analysis with the sign of path coefficients
Table 2
. Results of Model A (path coefficients and fit measures)
L M
2010
2011
2012
2013
Four-Year Integration
E R
C R
E R
C R
E R
C R
E R
C R
E R
C R
SICS
0.45***
0.34***
0.46***
0.33***
0.45***
0.29***
0.45***
0.25***
0.47***
0.30***
Accumulated Earnings Ratio
0.60***
0.61***
0.67***
0.67***
0.65***
Environmental Rating
0.22***
0.20**
0.22***
0.23***
0.23***
RMSEA GFI AGFI CFI
0.000 0.995 0.975 1.000
0.000 0.998 0.992 1.000
0.000 0.993 0.966 1.000
0.000 0.994 0.970 1.000
0.000 0.995 0.976 1.000
a. **p < 0.01, ***p < 0.001; b. Path coefficients are from M column to L row; c. C R: Credit rating; d. E R: Environmental rating; e. SICS: Standardized index of company size from sales and number of employees.
Table 3
. Results of Model B (path coefficients and fit measures)
L M
2010
2011
2012
2013
Four-years Integration
C R
E R
C R
E R
C R
E R
C R
E R
C R
E R
SICS
0.44***
0.29***
0.42***
0.32***
0.38***
0.30***
0.35***
0.31***
0.41***
0.31***
Accumulated Earnings Ratio
0.58***
−0.30**
0.60***
−0.25**
0.65***
−0.36***
0.65***
−0.35***
0.63***
−0.33***
Credit Rating
0.37***
0.33***
0.39***
0.40***
0.40***
RMSEA GFI AGFI CFI
0.000 0.999 0.994 1.000
0.000 1.000 1.000 1.000
0.000 1.000 0.997 1.000
0.000 0.999 0.986 1.000
0.000 1.000 0.995 1.000
a. **p < 0.01, ***p < 0.001; b. Path coefficients are from M column to L row; c. C R: Credit rating; d. E R: Environmental rating; e. SICS: Standardized index of company size from sales and number of employees.
ence is found on economic performance (credit rating).
In Model B, we obtain results similar to those of Model A, except for the accumulated earnings ratio. We find that while the accumulated earnings ratio has significant positive influence on economic performance (credit rating), it has significant negative influence on environmental management (environmental rating). We will discuss this significant negative influence further in Section 6. Next, we consider the goodness of fit results for Models A and B. Although there is no difference between A and B for RMSEA and CFI as seen in Table 2 and Table 3, GFI and AGFI take higher values for Model B. This means that Model B is more suitable than Model A. In Model B, economic performance is placed ahead of environmental management. Since companies’ main purpose is to raise economical corporate value, and because profitability is important for corporate management, it is natural for economic performance to be placed ahead of environmental management.
6. The Accumulated Earnings Ratio’s Significant Negative Influence on Environmental Management
In the previous section, Model B was adopted as a good model to express the relation mechanism of environmental management and economic performance in terms of corporate management. In Model B, the direct path coefficients from accumulated earnings ratio to environmental management (environmental rating) were obtained as −0.30 (2010), −0.25 (2011), −0.36 (2012), −0.35 (2013), and −0.33 (2010-2013 integration). The negative correlation between accumulated earnings ratio and environmental management (environmental rating) means that when the accumulated earnings ratio is high, the environmental management (environmental rating) is low, and vice versa. This suggests the existence of a company group (group X) with a low environmental ma- nagement evaluation but high accumulated earnings, and a company group (group Y) with high environmental management evaluation but low accumulated earnings. Accumulated earnings indicate some of the company’s surplus benefits, but how surplus of benefits are used depends highly on corporate management. It is considered that for group X, the corporate priority is to raise profits. On the other hand, group Y promotes environmental management even with fewer surplus benefits.
Next, consider that the accumulated earnings ratio could have an indirect effect on environmental management through economic performance (credit rating). In Figure 6, we find that the path coefficient from accumulated earnings ratio to economic performance is 0.65 in 2013, and that from economic performance to environmental management is 0.40 in 2013. Thus, the indirect effect is calculated to be a product of two coefficients, 0.65 × 0.40 = 0.26. Similarly, indirect effects in other years are calculated to be 0.21 (2010), 0.20 (2011), 0.25 (2012), and 0.25 (2010-2013). Now consider the overall effect given by a sum of the direct and indirect effects. The overall effects from the accumulated-earnings ratio to the environmental management are calculated to be −0.09 (2010), −0.05 (2011), −0.11 (2012), −0.09 (2013), and −0.08 (2010-2013). Thus, the overall effects in Model B are also negative. In Model A, we also find negative coefficients from accumulated earnings ratio to environmental management, but they are not significant.
Ricoh Company Ltd. is an example of a company belonging to group Y, which invests surplus benefits in environmental management and considers the sustainable development of society to be important. Ricoh Company Ltd. offers a farming experience program every year for 28 male and 28 female students ranging in age from the fourth year of elementary school to the second year of junior high school [37] . Ricoh Company Ltd. has to spend about 70 million yen for this program from its accumulated-earnings. In terms of environmental management activities, the relationship between surplus benefits and environmental management reflects the value the company’s corporate management places on environmental management.
7. Conclusions
In this research, 142 manufacturing industry companies listed on the first section of the Tokyo Stock Exchange were analyzed to study the relationships among company size, financial indicators, environmental management, and economic performance. The findings are as follows:
First, we examined two company size indexes: sales and the number of employees. The path analysis showed that the two indexes exhibit inconsistent results as measures of company size. Then, we used SICS, defined as sales and the number of employees together, and confirmed that SICS produces consistent results in the path analysis.
Second, we examined two models: Model A and Model B, and according to the goodness of fit results, we found that Model B is better than Model A. Model B has a path in which economic performance comes ahead of environmental management. This is consistent with the main purpose of companies, which is to raise economic corporate value; profitability is important for corporate management.
Finally, we found the first evidence that the direct path coefficient from accumulated earnings ratio to environmental management is significantly negative. This negative coefficient suggests that two company groups exist: a profit-oriented group (group X) and an environment-oriented group (group Y).
Our analysis is based on data for Japanese companies. Thus, it would be advisable to investigate further to de- termine whether our findings are also observed worldwide.
Acknowledgements
We deeply appreciate the helpful comments of sustainability governance group manager Dr. Atsuo Kishimoto and the members of the sustainability governance group at the Research Institute of Science for Safety and Sustainability at the National Institute of Advanced Industrial Science and Technology.
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