The impact of environmental accounting on the performance of companies in China

The impact of environmental accounting on the performance of companies in China

Introduction

Explain the importance of investigating this research problem.

Literature Review

Discuss the previous relevant studies and what has been done to date in this area of research. You also need to discuss studies undertaken in China in particular.

Research Problem

Based on the discussion presented above in the introduction and literature review, clearly explain the research problem and research gap.

Proposed Methodology

Briefly discuss the methodology that is/could be more appropriate for investigating this research problem as well as the data collection and sample selection.

1. Introduction

Over the years, there have been unsustainable development and production to meet the demands of the ever-growing population, and this is as per Nor et al., (2016). In tandem, the trend has led to the depletion of the non-renewable resources and pollution of the environment. China has been at the heart of this trend, and considering it is the most populous nation in the world and one of the most polluted countries in the world. To deal with the emerging environmental problems due to overpopulation and unsustainable development, there has been development in accounting that focuses on the environment. In 1992, the UN introduced the concept of environment accounting intending to enhance the field of sustainable development (Masud et al., 2017).

1.1 Justification for the study

In light of the above information, the first reason for studying ‘The impact of environmental accounting on the performance of companies in China’ is to understand how environmental accounting can solve the polluted environment. By mentioning environmental accounting, it is a subset of accounting proper whose target is the incorporation of both economic as well as ecological information. Therefore environmental accounting performance is the measure of the effectiveness of this field of accounting. As noted earlier, China is one of the most polluted countries in the world, and there are efforts to deal with the problem (Margerison, 2014). Besides, environmental accounting is useful in helping companies improve their performance regarding the environment. This is according to (Zhang 2017). Moreover, organizations can use cross-section data to map the trend of environmental performance. This is useful, especially for the Chinese firms that are seeking to improve environmental performance over the years. The data generated using environmental performance helps enhance decision making on the best approach to improve environmental performance.

Additionally, research on the impact of environmental account on the performance of companies in China is also helpful in adopting efficient technologies with less harm on the environment. It is critical to note the information generated using environmental accounting is useful in making decisions on the type of products and the machines that will be used by the companies. Based on the accounting information, companies can opt to use new materials and technologies that are less harmful to the environment.

Moreover, few studies like the publication by (Zeng, 2016) have focused on the impact of environmental accounting on the performance of the company, considering it is a new concept. This implies there is limited data that be applied in policymaking in China to deal with the environmental problems resulting from economic activities. Hence, the research aims at contributing data to the policymakers that can enhance the improvement of environmental performance.

1.2 Environmental performance

The concept of ecological performance refers to the outcome of the ecological strategy in comparison to the goals set by the firm or a given standard (Che-Ahmad et al., 2015). It should be noted the environmental performance is a measurable concept, which means the management can quantify the performance over a period. For instance, a manufacturing company can use the percentage of industrial waste as an environmental performance measure. Other metrics that can be used in measuring the environmental performance include the amount of carbon emission, food waste, the amount of recycled water, recycling rates, and reuse rate, according to Margerison (2014). To market the trend in environmental performance, it is essential to consider data that is generated over several years, which explains the essence of ecological accounting in a company.

1.3 Environmental accounting

Environmental accounting is a branch of accounting that integrates both the financial information and environmental information. Though the field is not fully developed considering the concept was first proposed in 1992 at the UN conference, it is widely applied globally, according to Nor et al., (2016). The primary objective of environmental accounting is to identify who companies use resources and the impact of resource use on the environment. Companies also use environmental accounting to measure the effect of economic activities on the environment and communicate the information to the relevant stakeholders. The field is also essential in reporting the level of compliance in a company with global standards. The policymakers and regulators use the information generated by environmental accounting to review policies and develop new standards.

1.4 Difference between Environmental Performance and Environmental Accounting

As explained earlier, ecological performance is different from environmental accounting. While environmental accounting is an established standard that focuses on measurement and reporting on the impact of economic activities in business on the environment, environmental performance is interested in whether the firm meets its target and standards as far asNor et al., (2016) is concerned. Environmental accounting focuses on generating information, which is used in the environmental performance strategy.

1.5 Justification of China as the case study

Firstly, China is one of the most polluted countries in the world, as noted earlier. So, using China as the case study will help in mapping the corporate strategies assumed to deal with environmental issues. Second, the Chinese government has pledged to focus on dealing with the environmental pollution; therefore, the policies in China on the environment will be instrumental in determining the effect of environmental accounting on the performance of Chinese corporations. Of note, the government in China shapes the policies and trends in the country, and thus the government support provides a conducive condition for investigating the effect of environmental accounting on the performance of companies. Lastly, China is a perfect case study as it is based on the philosophy of harmony with the environment. This is important in evaluating the association between the environmental condition and business performance.

2. Literature Review

Nor et al., (2016) sought to determine how the environmental disclosure influences the financial performance of firms in Malaysia. To achieve the research objective, the researcher used the dataset collected in 2011 from the top 100 companies in Malaysia based on the market capitalization. The researchers adopted the content analysis technique to analyze the information gathered from the annual report. The analysis showed a mixed outcome on the impact of environmental disclosure on the financial performance of the sampled firms. Some of the factors that contributed to the mixed results are that there are not regulatory and statutory requirements for the company in Malaysia to provide environmental disclosures. The company is motivated by the need to legitimize their existence in society, considering that the field of environmental accounting is still expanding and developing, to curb the effect of economic activities on the environment.

Che-Ahmad et al. (2015) embarked on a study to investigate the association between the environmental accounting and profitability of Nigerian firms. The researchers used a cross-sectional dataset collected in 2012 from 50 firms in Nigeria. Of note, the researchers relied on the environmental disclosures of the audited firms. Based on the analysis using the content analysis and regression analysis, the researchers noted there is a significant relationship between the environmental accounting disclosure and the performance of the sampled companies. However, the environmental accounting was moderated by the firm-specific factors such as size, the type of industry, and the auditing level.

Masud et al., (2017) investigated the environmental accounting and the reporting practices focusing on the banking companies listed in Bangladesh. The researchers used datasets collected from 20 banks listed on the Dhaka Stock Exchange between 2010 and 2014. The researchers observed there are diverse environmental challenges in Bangladesh, such as air and water pollution, degradation of the land, and issues in the management of waste that require incorporation of environmental accounting and reporting practices. Overall, the report identified there had been an improvement in ecological accounting with a significant rise in environmental information disclosure. The information on energy and waste management provided by the environment was instrumental in the managerial decision making, as explained by Masud et al., (2017). Hence, environmental accounting contributes to the performance of an organization by enhancing the process of decision making and providing relevant information to the managers and other relevant stakeholders.

Song et al. (2017) sought to examine whether environmental management can improve the financial performance of the firms. In this case, the researchers focused on China as the case study investigating the A-shares listed companies. The researchers used the dataset of A-shares listed companies collected between 2007 and 2011. Based on the analysis, the researcher concluded there is a positive association between environmental management and the financial performance of the A-shares listed firms in China. This implies the adoption of environmental accounting that enhances environmental management has a positive impact on the profitability of A-shares listed companies. However, Song et al., (2017) noted that environmental management is capital intensive, and thus it would have an insignificant effect on the performance of the company in the short run.

Zhang (2017) investigated information disclosure in China with a keen interest in enterprise environmental accounting. According to the researchers, China is experiencing dire environmental challenges owing to exponential growth in the enterprise. In tandem, the government has required the companies to adopt environmental accounting, such as information disclosures intending to solve the challenges posed by economic development on the environment. Zhang (2017) also observes the adoption of environmental accounting will also be instrumental in environmental protection policies in China. Nonetheless, the researcher found the process of adopting environmental accounting and accounting information disclosure in China has been sluggish.

Margerison (2014) embarked on a study to investigate environmental accounting in China. The researcher focused on the medium-sized state-owned enterprise to assess the level of accounting in China. According to the researcher, the development in environmental accounting in China leveraged on the Chinese philosophy on life-centered morality. This is projected to contribute to the wide adoption of environmental accounting intending to create balance and not solely to avoid reputation risks, as is the case in other countries. The researcher also observes the approach of China to environmental accounting will also be instrumental in the development of new accounting approaches.

Zeng and Sun (2016) conducted an empirical study on environmental accounting information disclosure, focusing on the coal sector and the washing industry. According to the researchers, environmental accounting is instrumental to firm performance as it promotes innovation to improve the structure of the industry. The researcher used China as a case study for the study. However, Zeng and Sun (2016) found there are challenges in environmental accounting in the two industries due to the lack of voluntary disclosures. The trend reduces the expected benefits from the adoption of environmental accounting. There are also challenges of non-uniform environmental standards and ineffective supervision in China that lowers the advantages linked with environmental accounting.

2.1 Research Gaps that necessitate studying environmental accounting in China

The existing studies do not provide a precise impact of environmental accounting on the performance of companies. For instance, Nor et al., (2016) noted environmental accounting, environmental disclosure, has a mixed impact on the financial performance of the sampled companies. This implies the past studies are not applicable in China, and a new study of the effects of environmental accounting on China is necessary. The dataset used in some of the studies is also outdated; for instance, Nor et al. (2016) used data collected in 2011 while Che-Ahmad et al. (2015) analyzed data gathered in 2012. There have been significant changes in environmental accounting, and thus the past studies are not sufficient to capture the current trends. Therefore, it is critical to carry out research focusing on China as the case study for investigating the link between environmental accounting and corporate performance.

Additionally, the information in the existing literature review was based on the past system of environmental accounting, and thus it is not reliable when investigating effect. For instance, Masud et al. (2017) argue there is a need to separate the conceptual framework to account for financial and non-financial firms. Therefore, existing studies are based on the model that does not customize the needs of a particular firm. Hence, this study will focus on the separate needs of the firm to overcome the challenges in the existing studies. There is also inconclusive evidence in the current studies. For instance, Song et al., (2017) found that environmental management that is based on environmental accounting in the short term has no impact on the financial performance of the Chinese A-shares listed companies. The existing studies are also based on past information, and there have been changes since conducting the studies. For instance, Zhang (2017) noted the process of environmental accounting adoption in China has been sluggish over the years. However, this could have changed by government intervention. Thus there is a need to carry out a new study to understand the impact of accounting information on the performance of the companies.

Other studies only focus on the possibility of the development of new environmental accounting practices in China owing to the difference in philosophy compared to other countries. Though the approach gives a background on the relevance of environmental accounting, it is essential to quantify the effect of environmental accounting on the performance of the investigated companies.

2.2 Similarities and differences between China and other countries in terms of environmental accounting and production.

Overall, there are similarities between the studies conducted in China and other countries. For instance, the studies seek to link the practice of environmental accounting and the performance of the sampled firms. Additionally, some of the studies in other countries and China investigate the listed companies considering listed firms provide disclosures to the stakeholders.

However, there is a difference between China and other countries. For instance, the disclosure on the environment is voluntary in China, while in most western countries, the firms are required to provide disclosures. The life-centered philosophy that is projected to influence environmental accounting in China differs from other countries.

3. Research Problem

3.1 Research Gaps

As noted in the literature review, the reviewed studies do not precisely address the research questions listed for this study. Therefore, it is essential to carry out research to address specific research questions.

Additionally, some of the reviewed studies were based on other countries and not in China. Of note, each of the sampled countries has different philosophy compared to China; therefore, it is critical to carry out a study that focuses on China and its philosophy.

Besides, there is contradicting evidence in the current studies. While some studies argue environmental accounting contributes to the performance of the sampled countries. However, other studies indicated the cost incurred in environmental accounting could not be recovered in the short run. There are also other empirical studies arguing there is sluggish adoption of environmental accounting in China due to the lack of voluntary disclosure and inadequate supervision. In light of the gaps in the existing empirical studies, it is essential to carry out a new empirical research to determine the effect of environmental accounting on the performance of Chinese companies.

The existing studies do not provide a precise impact of environmental accounting on the performance of companies. For instance, Nor et al., (2016) noted environmental accounting, environmental disclosure, has a mixed impact on the financial performance of the sampled companies. This implies the past studies are not applicable in China, and a new study on the effects of environmental accounting on China is necessary. Additionally, the information in the existing literature review was based on the past system of environmental accounting, and thus it is not reliable when investigating effect.

3.2 Research Question

The primary research question is

1. What is the impact of environmental accounting adoption on the performance of Chinese companies?

In this question, the research will focus on the three measures of performance; firstly, the study will investigate the effect on financial performance using profitability metrics. In this case, the study will seek to understand where the adoption of environmental accounting improves the profitability of the sampled Chinese companies. Secondly, the study will investigate the effect on corporate social responsibility. In this case, the study will seek to connect the adoption of environmental accounting on Corporate social responsibility (CSR) disclosures in the firm (Song et al., 2017). Thirdly, the research question covers how environmental accounting influences the number of customers served by the sampled companies. To answer the primary issue, the study will address three issues listed below;

1) Does environmental performance increase the number of customers among Chinese companies?

The question seeks to understand the perception of the customers on a firm that engaging the environmental management program and whether such understanding attracts and sustain the customers. In this case, the study seeks to understand whether the adoption of environmental accounting result in environmental performance and then increase the number of customers served by the sampled company.

2) Effect of environmental accounting on the financial performance of Chinese companies?

Regarding this question, the research will investigate whether the existing literature indicates the impact of environmental accounting on financial performance (Masud et al., 2017). Does the practice increase or decrease sales, profit and earnings for the shareholders? As noted earlier, the study will correlate the level of environmental accounting and financial performance. In this case, the study seeks to determine whether the adoption of the environmental account increases the profit of the sampled company.

3) What is the impact of environmental accounting on the stock price of Chinese companies?

The interest here will focus on determining whether the perception by customers on companies engaging in environmental performance affects the stock price. Additionally, the question focuses on whether the effect of environmental accounting on financial performance is also reflected in the stock prices. To answer this question, the study will investigate the trend of stock prices of the sampled companies that have already adopted environmental accounting in China.

4. Proposed Methodology

The study will use secondary data to answer the research questions listed above. The advantage of using secondary data is that it is easy to collect compared to the primary data. Besides, it is possible to analyze data from different sources to ensure it is accurate and relevant to the study (Masud et al., 2017). The benefit of using secondary data in this study is that information will be sourced from the audited annual report of the sampled companies to ensure it is accurate and reliable. It is essential to note secondary data consumes less time to collect compared to the primary data. In this case, the information will be sourced from online sources such as company websites and yahoo finance. However, the validity of the secondary data is compromised, considering the researcher has no control over the output of the data. To minimize the weakness of invalidity, the researcher will only use information from audited companies to ensure it is valid and reliable. Of note, the dataset that will be sourced from the annual report includes the level of environmental accounting, such as the level of disclosures on various environmental accounting such as carbon emission data, waste management, and energy efficiency. The information will be used as a measure of environmental accounting.

On the other hand, the effect of environmental accounting will be measured using stock prices, market share, and profitability. In this case, the dataset collected on share price will use the data in the last five years. The information about the share price of the sampled companies is accessible from Yahoo Finance. The website is credible and is globally accepted as a reliable source of financial information.

Similarly, the study will use data on market share in the last five years. The annual report will provide information on the performance using the profitability metrics such as gross profit, operating profit, and the net profit. Other measures that will be considered in the study include the earnings per share. This implies the companies considered as sample population have been using environmental accounting for at least five years. The essence of longevity in the use of environmental accounting is to measure the effect of the practice on the performance of the sampled companies.

Of note, the dataset will be collected from 10 companies (Huawei, PetroChina, Kweichow Moutai, Alibaba and Sinopec, Tecent, Industrial and commercial bank of Kenya, Ping an Insurance, China construction bank and agricultural bank of china) that are listed on the Shanghai and Shenzhen stock exchange. The rationale for sampling the five companies listed in the Chinese stock market is to ensure the information in the annual report is audited and reliable. The companies are also some of the largest in China, which improves the information available compared to smaller companies. In tandem, it will enhance the relevance of the findings and conclusions made in the report. The annual reports are accessible from the website of the sampled companies.

The research also applies extensive secondary data to address the research questions. Of note, the theoretical review and empirical review are supported by secondary data from peer-reviewed articles, blogs, books, and reports from the conference. The information is essential in integrating the relevant theories into the study. The analysis of the sampled information will be done using content analysis and correlation of data. To do this, the researcher will assign scores based on performance to the sampled companies to signify the level of environmental accounting adoption. The company with a perfect score will be awarded 10 points.

On the other hand, a company with a poor score on environmental accounting will be allocated a score of 1. The score will then be correlated with the financial performance, stock price, and the number of customers (market share). To improve the relevance of the analysis, the study will focus on the market share in China regarding the adoption of environmental accounting significantly affects the Chinese market compared to other markets ventured by the sampled Chinese companies. The advantage of correlation analysis is that it investigates the relationship between variables and thus is fit in assessing the impact of environmental accounting on the performance of the sampled companies. Correlation analysis is also useful when studying the behavior of a specific group. For instance, the correlation between market share and environmental accounting allows the researcher to understand the perception of customers on the adoption of environmental accounting. Hence, companies can leverage the information generated by the correlation analysis to improve environmental practices and expand the market share.

References

Che-Ahmad, A., Osazuwa, N. P., & Mgbame, C. O. (2015) ‘Environmental accounting and firm profitability in Nigeria: Do firm-specific effects matter?’, IUP Journal of Accounting Research & Audit Practices, 14(1).  Not italic, please page range( from xxx to xxx)

Margerison, J. (2014). Environmental accounting in China: the case of a medium-sized Chinese state-owned enterprise.

Masud, M., Kaium, A., Bae, S. M., & Kim, J. D. (2017) ‘Analysis of environmental accounting and reporting practices of listed banking companies in Bangladesh,’ Sustainability, 9(10), pp.1717.

Nor, N. M., Bahari, N. A. S., Adnan, N. A., Kamal, S. M. Q. A. S., & Ali, I. M. (2016) ‘The effects of environmental disclosure on financial performance in Malaysia,’ Procedia Economics and Finance, 35, pp.117-126.

Song, H., Zhao, C., & Zeng, J. (2017) ‘Can environmental management improve financial performance: An empirical study of A-shares listed companies in China,’ Journal of cleaner production, 141, pp.1051-1056.

Zeng, L., & Sun, X. (2016). Study on Environmental Accounting Information Disclosure of Coal Mining and Washing Industry’ s Listed Companies in China. In 2016 International Forum on Management, Education, and Information Technology Application. Atlantis Press.

Zhang, J. M. (2017). On Information Disclosure of Enterprise Environmental Accounting in China. DEStech Transactions on Economics, Business, and Management (icem).