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Angelo 2010 CSR and Budgeting.pdf

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Page 33 Journal of International Business Research, Volume 9, Special Issue 1 2010 THE IMPACT OF ENVIRONMENTAL INNOVATIONS ON FINANCIAL PERFORMANCE: THE CASE OF JAPANESE AUTOMOTIVE AND ELECTRONICS COMPANIES Michael Angelo A. Cortez, Ritsumeikan Asia Pacific University Cynthia P. Cudia, De La Salle University ABSTRACT Sustainability reporting has been standardized as a practice in Japan since 2001 in compliance with the Ministry of Environment’s environmenta
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   Page 33  Journal of International Business Research, Volume 9, Special Issue 1 2010 THE IMPACT OF ENVIRONMENTAL INNOVATIONS ON FINANCIAL PERFORMANCE: THE CASE OF JAPANESE AUTOMOTIVE AND ELECTRONICS COMPANIES Michael Angelo A. Cortez, Ritsumeikan Asia Pacific University Cynthia P. Cudia, De La Salle University ABSTRACT Sustainability reporting has been standardized as a practice in Japan since 2001 in compliance with the Ministry of Environment’s environmental reporting guidelines.  Manufacturing companies were quick to report their environmental costs as a result of innovations in product designs and process improvements. The economic benefits were estimated by the reporting companies in relation to their environmental costs. However, this case study of industries further explore how environmental innovations measured through environmental costs of Japanese automotive and electronics companies impact their financial  performance. BACKGROUND OF THE STUDY With the rapid pace of globalization and internationalization of multinational enterprises come social issues of environmental neglect and depletion of natural resources. Issues on sustainability, social responsibility and governance practices call for highlighting activities multinational enterprises (MNEs) engage in to preserve and repair its natural environment. While sustainability has a triple bottom line - environment, society and economy, environmental concerns seem to predominate value adding reports of Japanese companies. Arguably, without the environment, there will be no society; and without society, there will be no economy. Therefore, concerns for the environment encompasses societal and economic factors (Senge, 2008). Environmental innovations started early in Japan in response to pollution problems in the 1970s due to rapid industrialization and economic growth. Product design and process improvements have since been institutionalized to be environmentally compliant. Porter (2008) updates his views on competitive advantage with green solutions on resource productivity to societal problems. He cites that product and process improvements has related benefits of cost savings and other income.   Page 34  Journal of International Business Research, Volume 9, Special Issue 1, 2010 In 1997, the Ministry of Environment in coordination with various stakeholders and manufacturing companies came up with the guidelines for environmental reporting with the objective of standardizing reporting practices in Japan. This is in response to the absence of international environmental reporting guidelines, cognizant of the provisions of the Kyoto Protocol, and a move to advance the Global Reporting Initiative (GRI) of 1997. Four years after the initial implementation, the Japanese guidelines were revised and since then, environmental reporting has been a standard value adding non-financial report accompanying the annual report or internal revenue report of Japanese publicly listed companies in the New York Stock Exchange and Tokyo Stock Exchange. It is not surprising, therefore, that the highest adoption of sustainability reporting globally has taken place in Japan as a result of government initiative; followed by France, the U.K. and Germany (Kolk 2003). The KPMG International Survey of Corporate Social Responsibility (CSR) 2005 revealed that 80% of the 250 companies examined are reporting in the electronics and computers, utilities and automotive and gas sectors (Hopkins 2007). Japanese automotive and electronics companies are most relevant in sustainability studies because of the carbon emissions in the upstream and downstream processes. In its manufacturing activities, companies aim to reduce their carbon emissions while eliminating toxic substances through eco-friendly product designs and energy-efficient process improvements. At the end-user or customer level, products of these companies are subject to energy consumption efficiency, thereby doubling the carbon emissions concerns. The growing and varied concerns of stakeholders of a Japanese multinational enterprise in recent times highlight non-financial reports and disclosures that determine the quality or manner of financial performance. For almost a decade now, sustainability or environmental reports accompany financial reports to signal social responsibility and governance practices. It is in this light that the researchers investigate the question: how do environmental innovations impact financial performance of Japanese automotive and electronic companies? This study aims: (1) to present the benefits of environmental innovations to include cost savings and opportunities for other income; (2) to determine the impact of environmental innovations on financial performance of Japanese automotive and electronics companies; (3) and to conclude with lessons learned for countries where subsidiaries and manufacturing companies have not yet adopted the practice of sustainability reporting. Japanese automotive companies in this study include the global headquarters of Toyota, Honda, Mazda, Isuzu and Suzuki. For electronics companies, Toshiba, Fujitsu, Hitachi, Panasonic, and Sanyo were considered. The companies were chosen out of convenience and availability of comparable information. The scope of annual financial reports and environmental innovations costs from sustainability reports range from 2001 to 2008, which makes for consistency and comparability. Toyota and Honda are leading global automotive manufacturing companies. Including Mazda, Isuzu and Suzuki in the sample companies would comprise most of the Japanese automotive and motor manufacturers of varying size and product lines. Toshiba and Fujitsu are   Page 35  Journal of International Business Research, Volume 9, Special Issue 1 2010 likewise, globally renowned electronics brands. To provide for different sized companies, Hitachi, Panasonic, and Sanyo were included in the study. Investigating the impact of environmental innovations on financial performance highlights the benefits to be gained by manufacturing companies, in general, and subsidiaries and related parties within the extended enterprise systems and value chains of these Japanese MNEs in developing countries. Governments and regulators may likewise consider the benefits of sustainability reporting on social and environmental compliance issues of manufacturing companies. Finally, the diverse demands of stakeholders and customers on profitability and manner of business operations are met through non-financial reporting of sustainable practices. REVIEW OF LITERATURE Earlier literature abound on corporate social responsibility of MNEs on social and environmental issues. Earlier ‘environmental reports’, aptly titled and reported by automotive and electronics companies could be seen from a CSR paradigm. However, in recent times, as environmental philosophy is institutionalized in Japanese multinational automotive and electronics companies, sustainability can likewise be seen from a governance perspective. Sustainability reporting and environmental accounting in Japan Sustainability of the natural environment is essentially about the long-term maintenance of the earth’s ability to sustain itself (Crane 2008). Japan for Sustainability (JFS), a nonprofit organization providing information on developments and activities in Japan that lead toward sustainability defines the concept as: “Acts by humankind that respect the diversity of all creatures, and result in the  passing on of life, nature, livelihoods and culture to future generations within the carrying capacity of the natural environment, and the establishment of mutual connections with the purpose of building better societies and seeking the greatest happiness of the greatest number across both time and space.” In expanding sustainability’s triple bottom-line, sustainability is seen from the four areas of: nature, economy, society and well-being. The practice of environmental accounting in Japan has been in place for over a decade now. Since 1998, the disclosure of environmental information of publicly listed Japanese corporations has increased steadily from 35 percent to majority practice as a result of the government’s initiative, the Environmental Reporting Guidelines (2000) by the Ministry of Environment. While deemed voluntary, the adoption and common practice has established the guidelines as a norm or a standard.   Page 36  Journal of International Business Research, Volume 9, Special Issue 1, 2010 Published in May 2000 and revised in September 2002, the guidelines can be summarized in the following three points: environmental accounting system, environmental conservation cost, and environmental conservation effects and economical effects (Kokubu & Nashioka 2002). The Ministry of Environment (2002) describes environmental accounting in the following quote: Environmental accounting aims at achieving sustainable development, maintaining a favorable relationship with the community, and pursuing effective and efficient environmental conservation activities. These accounting procedures allow a company to identify the cost of environmental conservation during the normal course of business, identify the benefits gained from such activities,  provide the best possible means of quantitative measurement (in monetary value or physical units) and support the communication of its results. The guideline (2000) describes environmental accounting as a system that integrates financial performance and environmental performance through correlating the environmental conservation effects and economical effects associated with environmental measures. Environmental innovations on investments in assets refer to cash outlays on environmental concerns that benefit future periods. These may include the current acquisition value of plant and equipment that benefit the environment, research and development that qualify for capitalization, social costs, and environmental conservation. Environmental innovations on expenses are classified into six categories: (1) business area costs; (2) upstream/downstream costs; (3) management activity costs; (4) research and development costs; (5) social activity costs; and (6) environmental damage costs. In a recent study by the Ministry of Environment, Japan, translated as Research on Eco-friendly Activities of Japanese Corporation, the agency surveyed 2,526 companies that are listed in the first and second category of the Tokyo and Osaka stock exchange and 3,968 non-publicly listed companies with more than 500 employees. Over the period 2005, 2006 and 2007, half of the respondents answered they publish environmental reports. Thirty-seven percent (37%) of listed companies over the period answered they have been introduced to environmental accounting. Interestingly in 2007, 48.4% of headquarters have answered they have given directions to their subsidiary companies to abide by environmental management; a significant increase from 42.9% in 2005 (Ministry of Environment 2009). Kolk’s (2003) study of Fortune 250 companies revealed chemicals & pharmaceuticals topped the sustainability reporting percentages followed by computers & electronics and automotive manufacturers. While reporting trend percentages decreased from 1998 to 2001 in chemicals & pharmaceuticals (-8.33), higher rates of reporting were observed in computers & electronics (17.33%) and automotive (4.58%). Japan, France and Germany stood out as having
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