The Relationship between Environmental Management Quality and Financial Performance of AIM

350 Pages·2017·4.12 MB·English

The Relationship between Environmental Management Quality and
Financial Performance of AIM listed Firms in the UK

DANQUAH JEFF BOAKYE
(BSc, MBA, FCCA)

A thesis submitted in partial fulfilment of the requirements of
Bournemouth University for the Degree of
Doctor of Philosophy
August 2018

Department of Accounting, Finance and Economics
The Business School, Bournemouth University

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COPYRIGHT
This copy of the thesis has been supplied on condition that anyone who consults it
is understood to recognise that its copyright rests with its author and due acknowledgement
must always be made of the use of any material contained in, or derived from, this thesis.

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ABSTRACT
Environmental sustainability is an area of increasing concern for society, governments,
corporations, and policy makers worldwide. The adoption of sustainable environmental
practices contributes significantly to UK’s GDP and employment. However, theoretical and
empirical arguments on environmental and financial performance relationships have been
inconclusive with existing studies mainly focussing on large listed firms. The aim of this
study is to examine the relationship between environmental management quality (EMQ) and
Financial Performance (FP) of firms listed on Alternative Investment Market (AIM) in the
UK. The study has three main objectives. First, to determine the environmental management
quality and financial performance of AIM listed firms in the UK that are dominated by SMEs
as most of the existing studies in the UK have only focussed on large companies listed on
the main stock market. Second, to determine whether firm growth influences the
environmental management and financial performance relationship of AIM listed firms
which mostly consist of new and growing firms. Third, to determine if financial resources
have impact on environmental management quality and financial performance relationships
as much evidence suggest that environmental management practices of SMEs are low due
to resources constraint.
The thesis is based on a sample of 201 firms listed on Alternative Investment Market (AIM)
from 2011 to 2016 with a total of 1206 firm-year observation. The environmental
management quality measures were obtained through content analysis of annual and other
sustainability reports, with the financial performance measures extracted from Amadeus and
Fame Database. The relationship between environmental management quality and financial
performance was modelled using OLS panel regression technique, supported by Arrellano
Bond (GMM) dynamic panel regression model as a robustness check. The study also
discussed the various theoretical (resourced-based view and stakeholder theory) and
empirical studies that underpin environmental and financial performance relationships with
the aim of understanding how environmental management practices influence financial
performance whilst at the same time, identifying the gaps that exist in the prior empirical
studies.
The findings of the study suggest that strong opportunities exist for AIM listed firms to
improve their internal measure of financial performance (ROA) by improving their
environmental management quality. This confirmed the theoretical predictions that
sustainable environmental management is a unique resource that increases product
differentiation in the marketplace, enhances organisational image to customers, and as a
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result increases profitability. The study also revealed that the relationship between
environmental management quality and Financial Performance is inverted U-shaped;
suggesting that moderate level environmental management quality may generate the
optimum financial benefit based on internal measures of performance (ROA). Although
based on the sample from all firms listed on AIM, no significant relationship was discovered
between environmental management quality and market values. It was however discovered
that medium and larger firms that improve their environmental management quality also
improved their market values.
Regarding the impact of the firm growth on EMQ and FP relationship, no significant
association of growth on EMQ and FP relationship was identified. However, it was
discovered that the market punishes organic growth firms that pursue increase environmental
management practices, as the moderating impact of firm growth on EMQ and FP relationship
was negative. In relation to whether cash resources moderate EMQ and FP relationship, the
study revealed that efficient deployment of cash resources for environmental proactive
measures impact positively on financial performance. The result of this interaction also
indicates that excessive investment of cash resources on environmental management
practices would yield negative returns. The study confirms theoretical assertions based on
the resourced-based view that resources are essential for environmental and financial
performance relationships. In the case of stakeholder theory, the assertion that improved
environmental performance is rewarded by stakeholders was only confirmed in medium and
larger firms.
Finally, the implications and suggestions for future research were discussed. Whilst it is
expected that the establishment of business case will improve environmental management
quality of AIM listed firms, it is also recommended that flexible innovative regulations that
will encourage AIM listed firms to improve and disclose their environmental practices will
be a step in the right direction.

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Contents
COPYRIGHT .......................................................................................................................................... ii
ABSTRACT ................................................................................................................................... iii
LIST OF TABLES ................................................................................................................................... xi
LIST OF FIGURES ................................................................................................................................ xii
ACKNOWLEDGEMENT ...................................................................................................................... xiii
DECLARATION ................................................................................................................................... xv
DEDICATION ..................................................................................................................................... xvi
LIST OF ABBREVIATIONS AND ACRONYMS .................................................................... xvii
CHAPTER ONE ............................................................................................................................... 1
BACKGROUND OF THE STUDY ................................................................................................. 1
1.1 Introduction .............................................................................................................................. 1
1.2 Importance of UK in the Context of the Study .......................................................................... 4
1.3 Motivation and the Need for the Study .................................................................................... 6
1.3 Aims and Objectives of the Study ............................................................................................. 7
Research Questions ........................................................................................................................ 8
1.5 Summary of Research Methodology ........................................................................................ 8
1.6 Main Findings ............................................................................................................................ 9
1.7 Contributions of the Study ...................................................................................................... 10
1.8 Outline of the Research .................................................................................................... 13
CHAPTER TWO .................................................................................................................................. 16
ENVIRONMENTAL MANAGEMENT PRACTICES IN UK ..................................................................... 16
2.1 Introduction: ........................................................................................................................... 16
2.2 Definitions of Environmental Management ......................................................................... 16
2.3 International Policy Guidelines ............................................................................................... 18
2.3.1 Global Reporting Initiative (GRI, 2006) ............................................................................ 18
2.3.2 The United Nations Global Compact (UNGC) .................................................................. 21
2.3.3 International Standard Organisation (ISO 14001) ........................................................... 23
2.4 The EU Environmental Frameworks/Regulations/Policies ................................................. 24
2.4.1 Waste: The EU Directive 2008/98/EC: ............................................................................. 25
2.4.2 Ambient Air Quality Directive (2008/50/EC) .................................................................... 25
2.4.3 Chemicals: REACH (EC1907/2006) ................................................................................... 26
2.4.4 Emissions – Greenhouse Gases: EU Directive 2003/87EC (EU ETS) ................................. 27
2.4.5 Industrial Emissions: Directive 2010/75/EU: ................................................................... 28
2.4.6 Eco Management Audit Scheme (EMAS) ......................................................................... 29
2.5 Regulatory/Institutional Frameworks and Other Policy Guidelines in the UK ....................... 30
2.5.1 London Stock Exchange Guidance on Environmental Reporting ..................................... 31
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2.5.2 Department of Environment, Food and Rural Agency (DEFRA) ....................................... 31
2.5.3 The Companies Act 2006 ................................................................................................. 34
2.5.4 The Association of Chartered Certified Accountants (ACCA) – Environmental Reporting
and Accounting ......................................................................................................................... 35
2.6 Environmental Taxes, Reliefs and Schemes for UK Businesses .............................................. 37
2.6.1 Climate Change Levy (CCL) ............................................................................................... 37
2.6.2 CRC (Carbon Reduction Commitment) Energy Efficiency Scheme .................................. 38
2.6.3 Capital Allowances on Energy-Efficient Items – Enhanced Capital Allowance (ECA)
Scheme ...................................................................................................................................... 38
2.6.4 Landfill Tax ....................................................................................................................... 39
2.7 SMEs Business and the Environment in the UK ...................................................................... 40
2.8 The Alternative Investment Market (AIM).............................................................................. 44
2.9 Applicability of Environmental Regulations/Directives to SMEs ............................................ 45
2.10 Summary ............................................................................................................................... 46
CHAPTER THREE ........................................................................................................................ 48
THEORETICAL FRAMEWORK ................................................................................................ 48
3.1 Introduction ............................................................................................................................ 48
3.2 The Resource-Based View (RBV) ............................................................................................. 49
3.3 Stakeholder Theory ................................................................................................................. 55
3.4 Linkage between the Resource-based View and the Stakeholder Theory ............................. 61
3.5 Conceptual Framework ........................................................................................................... 62
3.6 Summary of the Chapter ......................................................................................................... 63
CHAPTER FOUR ............................................................................................................................. 66
EMPIRICAL LITERATURE REVIEW .................................................................................................. 66
4.1 Introduction ............................................................................................................................ 66
4.2 Environmental and Financial Performance Relationships ...................................................... 67
4.2.1 Studies that Support Positive Relationships .................................................................... 67
4.2.2 Studies that Supports Negative Relationships ................................................................. 77
4.2.3 Studies that Support No Relationships ............................................................................ 81
4.3 The Impact of Cash Resources on EMP and FP Relationships ................................................ 84
4.4 The Impact of Growth on EMP and FP Relationships ............................................................. 86
4.5 The Control Variables .............................................................................................................. 87
4.5.1 Governance Characteristics and Financial Performance ................................................. 87
4.5.1.1 Board Size .................................................................................................................. 88
4.5.1.2 Number of Non-Executive Directors ......................................................................... 89
4.5.1.3 CEO Remuneration .................................................................................................... 89
4.5.2 Firm Specific Characteristics ............................................................................................ 90
4.5.2.1 Size of the Firm ......................................................................................................... 90
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4.5.2.2 Industry ..................................................................................................................... 91
4.5.2.3 Risk tolerance (Leverage) .......................................................................................... 91
4.5.2.4 Liquidity ..................................................................................................................... 92
4.6 Summary of Studies on the Relationship between Environmental and Financial Performance
...................................................................................................................................................... 93
4.7 Limitations of Existing Research and Need for Further Research ......................................... 103
4.8 Summary and Conclusion ..................................................................................................... 106
CHAPTER FIVE .......................................................................................................................... 108
HYPOTHESES DEVELOPMENT ............................................................................................. 108
5.1ntroduction ............................................................................................................................ 108
5.2 Environmental Management Performance .......................................................................... 108
5.2.1 Environmental Management Quality (EMQ) and Financial Performance (FP) .............. 109
5.2.2. Energy Efficiency ........................................................................................................... 112
5.2.3 Compliance .................................................................................................................... 113
5.2.4 Waste ............................................................................................................................. 116
5.2.5 Emission to air, land and water/Greenhouse Gases ...................................................... 117
5.2.6 Material and Resource Efficiency................................................................................... 118
5.2.7 Stakeholder Relations/Supply Chain .............................................................................. 121
5.2.7 The Impact of Firm Growth on the Relationship between EMP and FP ........................ 123
5.2.8 The Impact of Cash Resources on EMP and FP Relationships ....................................... 124
5.3 Control Variables ................................................................................................................... 125
5.3.1 Size of the Firm .............................................................................................................. 125
5.3.2 The Nature of the Industry ............................................................................................ 126
5.3.3 Risk tolerance (Leverage) ............................................................................................... 127
5.3.4 Liquidity .......................................................................................................................... 128
5.3.5 Board Size ....................................................................................................................... 129
5.3.6 Number of Non-Executive Directors (NEDS) .................................................................. 130
5.3.7 CEO Remuneration ......................................................................................................... 131
5.4 Summary ............................................................................................................................... 132
CHAPTER SIX ................................................................................................................................... 134
RESEARCH METHODOLOGY ........................................................................................................... 134
6.1 Introduction .......................................................................................................................... 134
6.2 Research Philosophy/Methodology ...................................................................................... 134
6.2.1 Research Paradigms ....................................................................................................... 136
6.2.2.1 Positivism ................................................................................................................ 136
6.2.3 Anti-positivism (Interpretivism or Constructivism) ........................................................ 136
6.3 Research Approach ............................................................................................................... 137
6.3.1 Deductive and Inductive Research Approaches ............................................................ 137
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6.4 Research Methods ................................................................................................................ 138
6.4.1 Quantitative Method ..................................................................................................... 138
6.4.2 Definition of SME ........................................................................................................... 139
6.4.3 Sample Selection ............................................................................................................ 140
6.5 Variables ................................................................................................................................ 143
6.5.1 Dependent Variables (Corporate Financial Performance) ............................................. 143
6.5.2 Independent Variables (Environmental Performance of Measures) ............................. 144
6.5.2.1 Waste ...................................................................................................................... 145
6.5.2.2 Emission (Greenhouse Gases) ................................................................................. 145
6.5.2.3 Material and Resource Efficiency/Energy ............................................................... 146
6.5.2.4 Stakeholder Engagement ........................................................................................ 146
6.5.2.5 Compliance/Regulations ......................................................................................... 147
6.5.3 The Control Variables ..................................................................................................... 147
6.6 Summary of Dependent, Independent, and Control Variables ............................................ 148
6.7 The Research Strategy .......................................................................................................... 150
6.7.1 Content Analysis ............................................................................................................ 150
6.7.1.1 Sampling Unit .......................................................................................................... 150
6.7.1.2 Recording Units ....................................................................................................... 152
6.7.1.3 Scoring Rules and Process ....................................................................................... 153
6.7.1.4 Coding Process and Unit of Coding ......................................................................... 155
6.8 Panel Data Analysis ............................................................................................................... 168
6.8.1 The Panel Regression Model .......................................................................................... 168
6.8.2 The Fixed Effect Model .................................................................................................. 169
6.8.3 The Random Effect Model ............................................................................................. 169
6.8.4. Hausman Test ................................................................................................................ 170
6.8.5 Generalised Methods of Moments (GMM) ................................................................... 170
6.8.6 The Regression Model .................................................................................................... 171
6.8.7 Constraint and Unconstraint Companies ....................................................................... 172
6.9 Sensitivity Analysis/Robustness Test .................................................................................... 172
6.10 Reliability Assessment ......................................................................................................... 173
6.11 Validity Assessment ............................................................................................................ 175
6.12 Dealing with Outliers .......................................................................................................... 176
6.13 Multicollinearity .................................................................................................................. 176
6.14 Summary and Conclusions .................................................................................................. 177
CHAPTER 7 ...................................................................................................................................... 179
PRESENTATION AND ANALYSIS OF RESULTS ................................................................................. 179
7.1 Introduction .......................................................................................................................... 179
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7.2 Descriptive Statistics ............................................................................................................. 179
7.2.1 Descriptive Statistics of Dependent Variables ............................................................... 179
7.2.2 Descriptive Statistics of Independent Variables ............................................................ 185
7.2.3 Descriptive Statistics of Control and Interacting Variables ............................................ 186
7.3 Tests of OLS Assumptions and Bivariate Correlation Analyses ............................................. 187
7.4 Regression Analysis ............................................................................................................... 191
7.4.1 Environmental Management Quality (EMQ) and Financial Performance (FP) .............. 191
7.4.2 Results on the extent which EMQ influences FP ........................................................... 194
7.4.3 Different Measures of Environmental Management Quality and Financial Performance
................................................................................................................................................ 195
7.4.4 The Control Variables ..................................................................................................... 198
7.4.4.1 Firm Specific Factors ............................................................................................... 198
7.4.4.2 Corporate Governance Factors ............................................................................... 198
7.5 The Impact of Firm Growth on EMQ and FP Relationships .................................................. 198
7.5.1 OLS Regression results for EMQ and FP Relationship for Firms with Organic and
Inorganic Growth .................................................................................................................... 200
7.6 The Impact of Cash Resources on EMQ and FP Relationship ............................................... 203
7.6.1 Regression Results for the Impact of Cash Reserves on EMQ and FP relationships for
Cash Constraint and Unconstraint Firms ................................................................................ 204
7.7 Discussion of Results ............................................................................................................. 206
7.7.1 Environmental Management Quality and Financial Performance ................................ 206
7.7.1.2 The Case for Non-Linear Relationship Argument ................................................... 209
7.7.3 Disaggregated Measures of Environmental Management Quality and Financial
Performance ........................................................................................................................... 211
7.7.4 The Control Variables ..................................................................................................... 217
7.7.5 The Impact of Firm Growth on EMQ and FP Relationships ........................................... 221
7.7.6 The Impact of Cash Resources on EMQ and FP Relationships ....................................... 222
7.8 Robustness Test/Sensitivity Analysis .................................................................................... 223
7.8.1 GMM Regression of Environmental and Financial Performance Relationships ............ 224
7.8.2 GMM Regression of EMQ and FP Relationships based on Different Measures of FP ... 226
7.8.3 EMQ and FP Relationship based on Small, Medium, and Large Companies Listed AIM in
the UK...................................................................................................................................... 230
7.8.4 EMQ and FP Relationship based on Service, Manufacturing, and Mining Industries
Listed at AIM in the UK. .......................................................................................................... 241
7.9 Summary of the Chapter ....................................................................................................... 246
CHAPTER EIGHT .............................................................................................................................. 248
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ............................................................... 248
8.1 Introduction .......................................................................................................................... 248
8.2 Summary of the Research Findings ....................................................................................... 248
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8.2.1 Findings Based on EMQ and FP of AIM Listed Companies in the UK ............................. 248
8.2.2 Findings Based on Impact of Firm Growth on EMQ and FP Relationships .................... 250
8.2.3 Findings Based on Impact of Cash Resources on EMQ and FP Relationships ................ 250
8.2.4 Findings Based on the Robustness Test of EMQ and FP Relationships ......................... 251
8.1.5 Research Hypothesis Test and Outcome ....................................................................... 253
8.3 Contributions of the Study .................................................................................................... 253
8.4 Implications of the Research Findings and Recommendations ............................................ 258
8.4.1 Social Implication ........................................................................................................... 258
8.4.2 Policy Implication ........................................................................................................... 258
8.4.3 Practical/Managerial Implication ................................................................................... 260
8.5 Limitations of the Study and Suggestions for Future Research ............................................ 261
8.6 Chapter Summary ................................................................................................................. 263
REFERENCES .............................................................................................................................. 265
APPENDICES .................................................................................................................................... 303
Appendix 1: Results of Content Analysis from Environmental Management Quality of AIM listed
in the UK ...................................................................................................................................... 303
Appendix 2: Summary Statistics of Small, Medium and Large Companies................................. 330
Appendix 3: Computation of Residual and Cook Distance for Outliers ...................................... 331

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