AN EMPIRICAL TEST OF THE CORPORATE ENVIRONMENTAL GOVERNANCE - FINANCIAL PERFORMANCE RELATIONSHIP

Abstract

The extent to which corporate environmental governance is correlated with financial performance remains a topic for debate; however, consensus of opinion seems to be that there are environmental management initiatives that add value to a firm's bottom-line and environmental management initiatives that adversely impact a firm's bottom-line. From a holistic perspective, the environmental governance - financial performance relationship has been difficult to evaluate because of the complexities involved in identifying and separating environmental initiatives from daily corporate operating initiatives. This problem is compounded by the difficulties that external parties encounter when trying to identify and assess environmental governance without liberal access to confidential corporate environmental management information. Restricted access to information inhibits comprehensive analysis. This paper puts forth a new conceptual framework, The Environmental Landscape Forces Framework (ELF Framework), which ties together much of the existing theory on corporate environmental management. The ELF Framework provides analysts with a conceptual model that demonstrates how various forces influence a firm's environmental governance commitment. One specific application of the framework is to facilitate assessment of the corporate environmental governance - financial performance relationship. In the study presented in this paper, conceptual understanding of the forces which influence a firm's commitment to environmental governance are extracted from the ELF Framework and employed to guide assessment of publicly available corporate environmental disclosures for 88 firms ix Original from and digitized by National University of Singapore Libraries listed on 5 major stock market indices in Singapore and Canada. The environmental governance commitments of these firms were then compared to aggregate financial performance data in order to provide the comparative data for evaluating the environmental governance - financial performance relationship. The results indicate that no significant correlation exists between environmental governance and financial performance for firms within any of the industry indices studied. Acknowledging the positive contributions that certain environmental initiatives can have on firm profitability, this paper concludes that a weak correlation between environmental governance and financial performance could exist; however, the correlation is not strong enough to out-weigh the other elements that influence a firm's profitability. The implication of these findings for policy makers is that mechanisms other than free-market incentives are necessary if policy is to guide corporations toward adopting more sustainable environmental governance practices.