ABSTRACT
Environmental costs comprise both internal and external costs of environmental degradation due to industrial activities. The internal costs includes; pollution costs, costs for prevention and control, waste disposal, effluent control technologies, treatment, sanitation and clean up expenditure, material purchase value of non-product output, planning, shifting actions and damage repairs that can occur at companies and affect governments or people. While the external costs are; contaminated sites, fine and penalties, costs of regulatory compliance, legal costs, fumigation to reduce bacteria effects, damage to the corporate image and environmental liabilities. This study aimed at determining the influence of these environmental costs on the performance of Nestle Nigeria Plc, GlaxoSmithKline Nigeria Plc, Guinness Plc, Unilever Nigeria Plc and Nigerian Breweries Plc. The objective of this study is to assess environmental costs influence on profit indicators (Return of Capital Employed, Net profit Margin, Earning per Share and Dividend per Share) of the sampled Companies. The study made use of an exploratory research design. A sample of five companies were selected from a population of 22 manufacturing companies quoted on the Nigerian Stock Exchange using judgmental sampling technique. Data was collected through secondary source from published annual financial reports (2005 – 2014), which was analyzed using the Ordinary Least Square (OLS) method with the help of E-view version 3.1. The study revealed that Environmental costs have a negative but insignificant effect on ROCE and EPS, and positive but not statistically significant on NPM and DPS. The study concluded that environmental costs can be offset in generating revenue through the sales of waste, by products, recycling of waste, grant of subsidies, tax credits, financial/non financial awards. Also, accounting for environmental cost and performance can support an organizations development and increase firms profitability and operations in an overall Environmental Management System (EMS). It was recommended that Government, Financial and Regulatory Bodies should make Environmental Reporting in Annual Reports compulsory and Government Agencies should give tax credit, subsidies and financial/non financial awards to organizations that comply with its environmental laws of the land which will encourage environmental reporting.
CHAPTER ONE INTRODUCTION
1.1 Background to the Study
Most environmental degradations and emissions are anthropogenic, an advent traceable to the industrial revolution of late 18th century where economic activities in many communities moved from agriculture to manufacturing (Gray & Babington, 2001) as cited in (Papang, Bassey & Bessong, 2012). Production shifted from its traditional locations in the home and the small workshop to factories. The overall amount of goods and services produced expanded dramatically, new groups of investors, business people, and managers took financial risks and reaped great rewards (Lamberton, 2005) as cited in (Bassey, Sunday & Okon, 2013). In the long run the industrial revolution has brought economic improvement for most people in industrialized countries. Many enjoy greater prosperity and improved health. There have been costs; however, because industrialization has brought environment pollutants and greater land use, which have harmed the natural environment (Mastrandrea & Schneider, 2008) as cited in (Makori & Jagongo, 2013).
The ultimate disposal of the waste led to environmental pollution in many parts of the world, the magnitude of pollution of the environment has already reached an alarming level (Pramanil, Shil & Das, 2007). The awareness of the environment and man’s ability to cause damage started from the fifties of the 19th century. This concern had been repeatedly expressed in a series of international summits and consensus right from the sixties. Between 1968 and 1972, two international conference were held to asses the problems of the global environment and more importantly, to suggest corrective action. The world conference held in Stockholm on global environment in June, 1972 where the heads of the states all over the world came together for the first time, was the pivotal event in the growth of the global environment movement. The aim of the conference was to create a basis for comprehensive consideration with the United Nation of the problem of human environment and to focus the attention of the governments and public opinion to various countries on the danger of the problem; it ultimately gave birth to special UN Agency titled “United Nations Environmental Programme (UNEP)” (Touche, 1996) as cited in (Peter & Arzizeh, 2012).
In the mid-eighties, on the basis of changing situation and becoming the environmental issues, a world-wide phenomenon on the developed and developing countries, “World Commission on Environment and Development (INCED)” known as “BRUNTLAND COMMISSION” headed by Norways Prime Minister, Mrs. Gro Haslem Bruntland, was established by the UN. The commission published a report called “Our Common Future,” in 1987, with the proposed concept of “sustainable Development.” The concept received worldwide acceptance and led to the convening of the United Nations Conference on Earth and Development (UNCED), in Rio de Jenerio, Brazil known as Earth Summit. In this conference, heads of different states signed four agreed documents including the “Agenda 21.” The Agenda – 21 contains a checklist of do’s and don’ts to protect the environment throughout the next century. Particularly, the role of corporate entities in respect of overall management of the environment has been duly recognized in the conference (Touche, 1996) as cited in (Peter & Arzizeh, 2012).
Thus accounting became concerned with achieving new goals such as measuring and evaluating potential or actual environmental impacts of projects in organizations. These new goals are of great importance as they enable many users of financial statements to the different development decisions that are economically and environmentally sound (Bala & Yusuf, 2003) as cited in (Makori & Jagongo, 2013). In cognizance of this, the study sought to identify the various environmental activities and establish how their costs affect the performance of the manufacturing companies in Nigeria.
1.2 Statement of the Problem
The increasing global concern and the heightened awareness of stakeholders in respect to environmental accountability, several companies have assumed the responsibility of environmental disclosures in the financial reporting. It suffices to note that one problem with environmental accounting is that the information reported seems to be selective and as such, it is difficult to ascertain whether such environmental disclosures are anything more than corporate branding(Lehman, 1999) as cited in (Ebiringa, Emeh, Chigbu & Obi, 2013).
Environmental accounting involves the identification, measurement and allocation of environmental costs, and the integration of these costs into business and encompasses the way of communicating such information to companies’ stakeholders (Benneth & James, 1998). It is a comprehensive approach to ensure good corporate governance that includes transparency in its societal activities. The unserious attitudes of some firms not to take environmental accounting into consideration makes performance evaluation not realistic (Mein–chin, 2002) as cited in (Beredugo & Mefor, 2012). This is because environmental accounting helps a firm to charge all environmental costs incurred by the business thereby finding a way of curtailing the cost (environmental expenses) so that the business can increase profit. Also, environmental accounting helps firms to disclose to the outside world their ability to be environmental conscious thereby exposing specific environmental problems in financial reporting (Pramanik, Shil & Das, 2007). In the process, firms reveal the following internal environmental issues: – Identification of environmental cost and expenses, Capitalization of cost, Identification of environmental liabilities and Measurement of liabilities.
At present, no accounting standard has been issued for accounting treatment of these specific problems. Some guidelines regarding these issues have been issued by many organization such as international chamber of commence, the Japanese Industry Association, the chemical manufacturing association, inter-governmental working group of expert on intimation standards of accounting and reporting. As regard environmental reporting, different organizations have also issued guidelines e.g., New Economic Regulation (NER), enacted May 15, 2001, Environmental Matters, 2002, National Pollutant Inventory (NPI). But these guidelines are only advisory in nature and not mandatory. Consequently, this study is therefore, to investigate if quoted Manufacturing companies in Nigeria include environmental issues in their reporting format, and if so how this affects the performance of their companies.
1.3 Objectives of the Study
The main objective of this study is to assess environmental costs influence on performance indicators of quoted Manufacturing Companies in Nigeria. To achieve this main objective, the specific objectives are to:
1. Ascertain the influence of environmental costs on the Return on Capital Employed (ROCE) of the quoted Manufacturing Companies in Nigeria.
2. Examine the influence of environmental costs on the Net Profit Margin of quoted Manufacturing Companies in Nigeria.
3. Ascertain the influence of the environmental cost on the Earning per Share (EPS) of the quoted Manufacturing Companies in Nigeria.
4. Examine the effects of environmental cost on the Dividend per Share (DPS) of quoted
Manufacturing Companies in Nigeria.
1.4 Research Hypotheses:
The following hypotheses were formulated for the study:
1. Environmental cost does not significantly influence the Return on Capital Employed of quoted Manufacturing Companies in Nigeria.
2. Environmental cost does not significantly influence the Net Profit Margin of quoted Manufacturing Companies in Nigeria.
3. Environmental cost does not significantly influence the Earning per Share of quoted Manufacturing Companies in Nigeria.
4. Environmental cost does not significantly affect the Dividend per Share of quoted Manufacturing Companies in Nigeria.
1.5 Significance of the Study.
Environmental accounting enhances the quality of decision-making, requiring organizations (Manufacturing Companies) to establish a baseline (standard) of its greenhouse Oil and Gas emissions, energy usage, resource usage and set reductions targets. It also helps the realization of the importance of changing unsustainable consumption and production patterns alongside protecting and managing Nigerian natural resources and resource intensity through environmental performance reporting occasioned by the ratio between an environmental variable and a financial variable that measures the environmental performance of an enterprise with respect to its financial performance.
The study is beneficial to Stakeholders/Communities who increasingly require companies to manufacture goods efficiently eliminating negative influence to the environment; the aim is to enhance sustainable development by reducing the negative environmental impact while increasing the value of an enterprise, satisfying human needs and thereby contributing to the quality of life.
This is also beneficial to the government as it is in line with the assertion by the United Nations Conference on Trade and Development(UNCTAD), which requires decreased environmental impacts while increasing the added value by the enterprise such that in both the short and long run, the Nigerian Economy would experience a constant and viable social, economic and environment that meets the needs of the present without compromising the ability of future generations to meet their own needs which sustainable development stands for.
The importance of this study is beneficial to the students of higher institutions who are in Nigeria and else where and as well as researchers for further development and improvement in the subject matter.
1.6 Scope and Delimitations of the Study
This study examines the influence of environmental costs on the performance of quoted Manufacturing Companies on the Nigerian Stock Exchange. The study was limited to five (5) Companies: – Nestle Nigeria Plc, GlaxoSmithKline Plc, Unilever Nigeria Plc, Guinness Nigeria Plc and Nigerian Breweries Plc. Annual Published Financial Reports for 10 consecutive years (2005 through 2014) were used and the indices consist of Return on Capital Employed, Net Profit Margin, Earning per share and Dividend per share. The justification for selecting the five companies were based on availability of data, their business activity is not of investment type (non-holding company) and the company is not suspended from the stock exchange during the period between 2005 and 2014. The fundamental reasons for using 2005 through 2014 as the time frame for the study were that prior to 2005, environmental reporting was still at a voluntary compliance stage in Nigeria, it was only when the Statement of Accounting Standard (SAS) 23 focusing on environmental matters became effective in 2005 that some firms in Nigeria started to report environmental issues.
The limitation of the study was that some of the companies targeted by the study were either suspended by the Nigeria Stock Exchange or had incomplete records at the time of the study. It was therefore not possible to obtain their consolidated financial reports for the period covered by the study, thus the findings of the study may not be generalized to these companies.
1.7 Operational Definition of Terms
Depletion of nonrenewable energy resources. Energy consumption is a global issue and relevant to all businesses across sectors (Muller & Sturn, 2001). The total energy consumed equals energy purchased or obtained (e.g. coal, natural gas) minus energy sold to others for their use (e.g. electricity, steam).
Depletion of fresh water resources. Water consumption is the sum of all fresh water purchased from a water supplier or obtained from surface or ground water sources. Availability of fresh water is a global issue
Depletion of the ozone layer. Ozone depleting substance (ODS) emissions are a global concern, defined in the Montreal Protocol which lists the groups of gases that are contributing to the effect and describes their impact potential.
Dividend per Share: the amount of gross dividend declared every year which is receivable by every shareholder per unit of share.
Earning Per Share: this indicates the net returns attributable to each ordinary share.
Greenhouse gas (GHG) emissions include carbon dioxide (CO2), methane (CH4), nitrous oxide (N20), hydro- and perfluorocarbons (HFCs, PFCs) and sulfur hexafluoride (SF6) emissions from fuel combustion, process reactions and treatment processes.
Material usage: resources such as the Sum of weight of all materials purchased or obtained from other sources, including: raw materials for conversion, other process materials (such as catalysts, solvents), pre- or semi-manufactured goods and parts are expected to be reported in metric tons.
Net Profit Margin: this expresses the relative profitability of the business after taking into account all incomes and all expenses.
Return on Capital Employ: this indicates the percentage return generated by total funds employed to finance the operations of a company during an accounting year.
This material content is developed to serve as a GUIDE for students to conduct academic research
INFLUENCE OF ENVIRONMENTAL COSTS ON THE PERFORMANCE OF SOME SELECTED QUOTED MANUFACTURING COMPANIES IN NIGERIA.
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