ABSTRACT
This study examines the effects of environmental cost disclosure on the financial performance of quoted oil and gas companies in Nigeria. The research work reviewed data and other related literature between 2006 and 2015. Data on environmental cost were collected to measure waste management cost (WMC) and environmental taxes and fines (ETF) respectively. While data on financial performance proxies were return on assets (ROA), earnings per share (EPS) and return on capital employed (ROCE). Multiple regression analysis was used to analyse the data, employing the f-statistics to measure overall variables significance, r-square to determine the explanatory strength and power of all independent variables on the dependent variables, and Durbin Watson formula to determine autocorrelation amongst the variables. Results are significant at 5% level of significance and it shows that there is a significant positive relationship between the environmental cost and financial performance of firms. Findings also revealed that adequate disclosure on environmental cost, compliance to corporate environmental regulations have positive significance on financial performance. Thus the study recommended regulatory enforcement for adequate environmental cost disclosure and proper reporting.
TABLE
OF CONTENTS
Title page i
Declaration
ii
Approval
page iii
Dedication iv
Acknowledgement v
Table of
contents
vi
List of
tables ix
Abstract x
CHAPTER 1: INTRODUCTION
1.1
Background to the Study 1
1.2
Statement of the Problem 3
1.3
Objectives of the Study 5
1.4 Research Questions 5
1.5
Research Hypotheses 6
1.6
Significance of the Study 6
1.7 Scope of the Study
6
1.8 Limitation to the Study 7
1.9 Operational Definition of terms 7
CHAPTER 2: REVIEW OF RELATED LITERATURE
2.1 Conceptual Framework 10
2.1.1 Concepts of
environmental cost 10
2.1.2 Environmental
costs for tests in the development phase 11
2.1.3 Environmental
taxes/fees 13
2.1.4 Environmental
permits or certificates 14
2.1.5 Environmental
damage and cleanup insurance 14
2.1.6 Environmental
investments/waste management 14
2.1.7 Environmental quality reporting/ disclosure 16
2.1.8 Financial
performance 17
2.2 Theoretical Framework 18
2.2.1 The corporate social responsibility (CSR)
theory 18
2.2.2
Environmental
quality cost management theory 20
2.2.3 Environmental regulations in Nigeria 21
2.3 Empirical
Review 22
2.3.1 Gaps identified in literature 31
CHAPTER 3: RESEARCH METHODOLOGY
3.1
Research Design 35
3.2 Area of Study 35
3.3 Method
of Data Collection 35
3.4 Model
Specification 35
3.5 Variable Definition/Specification 36
3.6 Data Analysis Techniques 37
CHAPTER 4: RESULTS
AND DISCUSSIONS
4.1 Data
presentation 38
4.2
Descriptive Statistics 40
4.3 Test of
Hypothesis 42
4.4
Summary of Findings
CHAPTER 5: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1
Summary 47
5.2
Conclusion 48
5.3
Recommendations 48
5.5
Contribution to Knowledge 49
Reference 50
Appendix 53
LIST OF TABLES
Table
4.1: Data presentation of Ten (10) years financial data of seven quoted oil
and gas companies in Nigeria
39
Table 4.2 Descriptive Statistics
Table for the distribution of variables 41
Table
4.3: Regression result of the Fixed Effect Model on ROA 42
Table
4.4: Regression result of the Fixed Effect Model on ROCE 43
Table
4.5: Regression result of the Fixed Effect Model on EPS 44
CHAPTER 1
1.0 INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The
performance of firms in terms of profitability largely depends on the nature of
a business they operate, and the possible legal, political and environmental
regulations, which constitute an important item of public policy within the
scope of their operation. The nature of business a firm operate also defines
the risks attached to such business and risk constitutes a significant factor
in the performance of the firm’s operation.
Higher
financial risks constitute enormous treats to firms’ profitability, though they
are likely to attract huge amount of profits.
Mgbame (2013) observed
that increasing emphasis on the role of firms in ensuring environmental
sustainability has required a multidisciplinary approach to issues of
environmental protection. While it is observed that environmental practices
have often been perceived as the opportunity cost of economic growth, the ideal
towards sustainable development is beginning to dominate the sphere of public
policy. The implication on corporate entities in this regard is to reconfigure
their corporate objectives to reveal the same levels of environmental
accountability. However, environmental disclosures are discretionary,
suggesting that corporations exert unimaginable influence on the preparation
and reporting of social and environmental cost information. Consequently, a
disturbing effect is that in most cases, firms’ claims of being environmentally
responsible may simply reflect an attempt at corporate branding.
According
to Field (2002), environmental depletion and degradation to the environment
were almost forgotten and it continued until people in the developed countries
(e.g. club of Rome) realized that it was not good having great corporate
profits without considering the cost of managing large scale of the ecosystem
by which we are nourished. It became obvious that degradation, pollution and
accelerated destruction of the ecosystem and the depletion of non-renewable
environment biodiversity have serious impact on the financial performance of
firms.
Dimowo
(2010) observed that companies in pursuit of profits can do great social harm to
the environment and the environment suffers thus, there is an emphasis for a
meeting point between corporate objective of profit maximization and the need
for environmental management. In this regard, the need for environmental cost
has become the concern and focus of nations and responsible corporate managements
(Okoye & Ngwakwe, 2004).
Environmental
Management Systems (EMS) have become apparent as a means to orderly employ
business management to environmental costs to enhance a firm’s long-run
financial performance by developing processes and products that at the same
time improve competitive and environmental performance.
However
within the developing nations, the understanding is somewhat different mainly
because of deficiency in government regulations and lack of organized pressure
groups and consumer awareness to influence corporate behavior. In enhancing
profitability, environmental cost in terms of effective organizational cost
reduction are a highly practical approach towards managerial justification of
environmental management system in enhancing profitability.
Thus,
environmental cost provides a background to environmental responsibility and
corporate financial performance. Waste management costs and environmental taxes
and fines was used to show the extent to which environmental costs influence
financial performance of firms, the impact of these variables on financial
performance, represented here by return on total assets, return on capital
employed and earning per share was examined in this work.
Since environmental cost has now become a global
issue; managers have to focus their attention on creating biodegradable
products that can be recycled.
It
is based on this background, that this study is intended to look into the
effects of environmental cost disclosure on the financial performance of oil
and gas firms in Nigeria.
The study provides
insight on how firms report environmental cost, quantitative (verifiable or
auditable) environmental information in their annual reports and the extent
this information reasonably affects the firms’ financial performance generally.
Parameters on environmental cost ranging from
community development cost, waste management cost and pollution control,
environmental taxes and fines was examined.
1.2 STATEMENT OF THE PROBLEM
Business
and its environment are mutually related. Business impacts the environment with
its activities, but the environment also creates the conditions for the
business operation and growth. This results in a need to take into account the
relationship between the entity and its environment in the information system
of a business. In the face of an
increasing effects of environmental pollution usually informed by firms’ activities,
it has become imperative to focus attention on how these activities impact on
the natural environment and also the financial implication this has on the
overall performance of the business entity.
There is
lack of adequate disclosure on environmental activities of oil and gas industries
concerning their day-to-day operations.
Environmental
cost items like waste management costs, taxes and fines and gas emission
control costs are not specifically disclosed in most financial reports of oil
and gas companies.
Waste
report for instance which includes: annual reports on products, packaging, and
the management of waste resulting from them, as well as an annual report on the
waste produced and waste management are not adequately disclosed. And in most
cases, items of environmental cost are wrongly reported to either social cost
or omitted from the accounting information.
There is
no clear distinction between what constitutes environmental cost and what
constitute corporate social responsibility accounting and how each is been treated.
It should be understood that a firm’s environmental policies is required to
comply with environmental regulations issued by the government or local
authority or both as the case may be. Fines or penalties may be imposed on the
firm when there is violation or noncompliance to the above regulations.
In
Nigeria, the challenge on environmental cost reporting is that of inadequate
disclosure and lack of uniformity of reporting cost items considered to be
environmental cost. There is poor compliance to government and regulatory
authorities by most oil companies due to weak and corrupt institutional systems
which usually ends up with a kickbacks syndrome, paving way for huge violation
of environmental rules, safety measures and environmental protections.
Environmental
expenses (costs) as identified for investigation in this work include; waste
management cost and environmental taxes and fines.
This study
therefore examines the impact of environmental costs and how they affect firms’
financial performance, focusing on the Nigerian oil and gas companies.
1.3 OBJECTIVES OF THE STUDY
As
a result of non-disclosure of environmental cost, this study uses only two
variables of environmental cost, which are waste management cost and
environmental taxes and fines. Therefore, the broad objective of the study is to
determine the effect of environmental cost disclosure on the financial
performance of quoted oil and gas companies in Nigeria. Specifically, the
objectives are:
1.
To examine
the effects of waste management cost, environmental taxes and fines on return
on assets (ROA).
2.
To
determine the effects of waste management cost, environmental taxes and fines
on return on capital employed (ROCE).
3.
To measure
the effects of waste management cost, environmental taxes and fines on earnings
per share (EPS).
1.4 RESEARCH QUESTIONS
The
following research questions will help in the understanding of the identified
problems
1.
To
what extent doeswaste
management cost, environmental taxes and fines affect firm’s return on assets
(ROA)?
2.
To
what extent doeswaste
management cost, environmental taxes and fines affect return on capital
employed (ROCE)?
3.
To
what extents do firms earnings per share (EPS) affected by waste management cost and
environmental taxes and fines?
1.5
RESEARCH HYPOTHESES
HO1: Waste management cost,
environmental taxes have no significant effect on return on assets (ROA).
HO2: Waste Management Cost,
environmental taxes and fines do not significantly affect Return on capital
employed (ROCE).
HO3: Waste management cost,
environmental taxes and fines do not significantly affect earnings per share
(EPS).
1.6 SIGNIFICANCE OF THE STUDY
This
work is intended to benefit the following interest groups:
Shareholders:
This study will help in meeting shareholders’ expectations and responsibility
in making decisions capable of improving firm’s value and credibility in order
to attract investments.
Investors:
This study will help investors who are willing to invest their money in
socially responsible firms to assess the viability and environmental
performance of the company before making investment.
Policy
Makers: This study will enable the management of the firms,
government and relevant authorities to framework regulations that will improve
the conducive working environment and ecological protection.
Creditors:
This study will also be useful for both internal and external creditors to the
firms to get an in-depth understanding of the company’s financial position and
to gauge the future profitability and liquidity of a company.
1.7
SCOPE OF THE STUDY
This research work examines the effect of
environmental cost disclosure on firm’s financial performance using quoted companies
under the oil and gas sector in Nigeria over a period of ten years between
2006-2015. Published financial reports of seven major oil and gas companies
were examined for the period under review, to measure variables on
environmental cost (EC), which include waste management cost (WMC) and
environmental taxes and fines (ETF) respectively. Proxies on financial
performance include return on assets (ROA), return on capital employed (ROCE)
and earnings per share (EPS).
1.8 LIMITATION TO THE STUDY
Empirical
work on environmental cost in Nigeria is a recent area of study and
characterised by complex information non-disclosure from the oil companies.
This is the case faced by this work, more so information availability in the
oil and gas sector is rarely available for easy access because of the strict
nature of their operations. This constitutes major difficulties in conducting
this study, as there are very few works with respect to environmental cost
accounting and usually had to be mixed up with social responsibility cost.
Furthermore,
a number of oil and gas companies in Nigeria are not quoted in the Nigerian
stock market. There are few ones operating and are been quoted in the stock
market, Hence the extent of obtaining published financial reports and prior
research literature available on environmental cost from these companies was limited.
1.9 OPERATIONAL DEFINITION OF TERMS
Environmental
accounting: Environmental accounting as defined by Gray et’al
(2011) as a management tool addressing all areas of accounting that may be
affected by the response of business organizations to environmental issues,
including the new area of ecological-accounting. According to the Public
Accounts and Estimates Committee (PAEC, Poland), which defined it as a process,
which provides information on the environment and the impact of human activity
on the environment that is useful in making appropriate decisions at various
levels of management. It is also an expression of the monetary and
non-financial activities of an entity with regard to the environment.
Environmental
Cost(s): This is an aspect of environmental accounting, which
discloses an entity’s financial response to environmental issues as a result of
its activities. This includes waste management cost, gas and chemical control
cost, taxes and fines from regulatory bodies and other emissions control cost
resulting from the operational activities of the companies.
Environmental
laws/regulations: These are legislations and enactments imposed by
government through relevant authorities to guide the activities of companies
within their operational environment. These regulations usually require strict
compliance and adherence by the operating companies.
Fines
and penalties: These are fees paid for non-compliance with
environmental regulations. These are charged to the profit and loss account in
the period in which they are incurred, regardless of whether the activities
that resulted in the penalties had taken place in an earlier accounting period.
Pollution
abatement cost: This is a cost borne by a business for the removal
and/or reduction of an undesirable item that they have created. Abatement costs
are generally incurred when corporations are required to reduce possible
nuisances or negative byproducts created during production. Examples of
abatement costs would be the pollution reduction costs of paper mills and noise
reduction costs of manufacturing plants.
Waste
management: This involves sensing, sorting, separating,
transforming, returning to service what can be used and properly disposing what
is left, they are either a by-product of initial production process or they
arise when objects or materials are discarded after they have been used.
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