Master Thesis SCM
Faculty of Economics and Business University of Groningen
Board of Directors support on International environmental agreements and corporate environmental performance: The
difference between E.U. and U.S. companies
Name: Spyridon Goudis Student number: S3749797 Supervisor: Dr. Thomas Bortolotti
Co-assessor: Dr. Niels Pulles
Acknowledgments
Firstly, I would like to thank my supervisor dr. Thomas Bortolotti for his overall guidance and support during the project of the Master Thesis. Moreover, I would like
to thank the co-assessor of the project, dr. Niels Pulles for his insightful feedback.
Lastly, I would like to thank all the people who supported me throughout my Master studies.
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ABSTRACT ... 3
1. INTRODUCTION... 4
2. THEORETICAL BACKGROUND ... 6
2.1. Institutional theory ... 6
2.2. Governmental regulations ... 8
2.2.1. E.U. and U.S. environmental policy... 8
2.2.2. Paris agreement ... 9
2.2.3. International Environmental Agreements (IEAs) ... 10
2.3. Corporate environmental performance (CEP)... 11
2.3.1. CEP and corporate governance ... 12
2.4. Hypotheses and conceptual framework ... 13
3. METHODOLOGY ... 15
3.1. Sample and data collection ... 15
3.2. Measurement of variables ... 16
3.3. Data analysis ... 20
3.4. Results ... 21
4. DISCUSSION ... 25
4.1. Managerial implications ... 29
4.2. Limitations and future research ... 30
5. CONCLUSION ... 31
BIBLIOGRAPHY ... 33
APPENDIX A : Process model results ... 40
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ABSTRACT
This research aims at clarifying how the board of directors (BOD) perception of international environmental agreements (IEAs) influences environmental firm performance. Grounding on institutional theory, interaction due to the origin of the company has been tested with respect to different governmental environmental policies. A quantitative study was conducted using data from the Carbon Disclosure Project questionnaires, comparing companies from E.U. and the U.S. The study concerns the period between 2015 and 2017 when Paris agreement had been signed from 195 United Nations member states and 2017 has been utilized as the latest reliable CDP questionnaire regarding corporate GHG emissions. The findings highlight the importance of BODs commitment to environmental issues as it is positively related to corporate environmental performance. Moreover, the origin of the company found to moderate this relationship. Further empirical research is needed to generalize the findings, extending the sample into companies from other regions. This work presents some practical implications for policymakers and to corporate governance as well. Institutions should realize the power they have on enhancing BODs willingness to improve the environmental performance of their firm by prioritizing climate change mitigation. Board of directors that are determined about climate change urgency will spread this need into the firm which can be captured through the corporate environmental performance.
Keywords: environmental sustainability, international environmental agreements, corporate environmental performance, board of directors, institutional theory, European Union, United States of America
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1. INTRODUCTION
An issue that has triggered the interest of not only researchers but also multiple groups including international organizations and governments, is global warming and climate change (Kılıç &
Kuzey, 2019). In response to this concern, more people have started embracing that every living organism is dependent on Earth’s sustainability (Clarke-Sather & Cobb, 2019). In United Nation’s invitation for the climate action summit of 2019, the importance of handling with climate change was pointed out due to the fact that the warmest years ever being recorded, were the last four and winter temperature in the Arctic has risen 3 °C from early 1990’s (United Nations Climate Change Summit, 2019). Due to mounting pressures on taking action about climate change, firms around the world have started setting up greenhouse gas (GHG) mitigation targets to control their environmental pollution (Wang & Sueyoshi, 2018). As a result, an emerging field of research is the investigation of how and why corporations react to the increased global awareness around sustainability issues (Naciti, 2019).
Prior literature has issued the importance of corporate governance on shaping corporate environmental behavior. What has been extensively studied is managers’ perception on environmental aspects (Pérez, Ruiz, & Fenech, 2007; Spencer, Adams, & Yapa, 2013; Latan, Chiappetta Jabbour, Lopes de Sousa Jabbour, Wamba, & Shahbaz, 2018) and various board of directors (BODs) characteristics, like board age, the number of independent directors, and gender diversity (Chams & García-Blandón, 2019; Ismail & Latiff, 2019; Kouloukoui et al., 2019) are influencing corporate environmental performance. However, the examination of how BODs perceive environmental issues and more specifically whether its support on international environmental agreements influences corporate environmental performance is limited. The importance of global mobilization has been declared from United Nations, illustrating the global nature of climate change which makes the need for international cooperation important and could be achieved through cross-national environmental agreements (IPCC Mitigation of Climate Change, 2014). When top management commitment to environmental issues exists within a company, the modification of firm’s environmental behavior can be clearly executed (Latan et al., 2018), especially taking into consideration the superior level of BODs within organizations’ structure (Johnson, Schnatterly, & Hill, 2013). In previous studies, it has been underlined that top -level management environmental perception can influence corporate social responsibility and the environmental responsiveness of the firm (Colwell & Joshi, 2013;
Harjoto, Laksmana, & Yang, 2019). Despite BODs power, it mainly focuses on taking symbolic actions to gain legitimacy avoiding long-term projects for improving firm’s environmental performance, which can be initiated from International Environmental Agreements (IEAs)
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(Haque & Ntim, 2018). Nevertheless, the effectiveness of such environmental regulations established by governments is still debated (Ortiz-de-Mandojana, Aguilera-Caracuel, &
Morales-Raya, 2016; Grunewald & Martinez-Zarzoso, 2016). Therefore, there is a lack of literature regarding the relationship among international environmental agreements, corporate board and corporate GHG emissions. It is possible that such united actions mobilize BODs to take environmental action which can be reflected to low corporate GHG emissions, a measurement that has been identified as the main driver of climate change due to human activities (Yunus, Elijido-Ten, & Abhayawansa, 2016).
Within such studies, an interesting concept that has been used in order to investigate the different way that corporations and their members behave is the institutional environment around them (Baughn, Bodie, & McIntosh, 2007). When governments regulate, firms are obliged to comply with them and meet certain standards, even when they are unwilling to (S.
Wang, Li, & Zhao, 2018). Institutional theory is fitting when examining such differences, supporting that governmental policies and public awareness on environmental issues are shaping the way corporate governance comprehends sustainability and behaves accordingly (Ortiz-de-Mandojana et al., 2016). Despite the effort that has been put worldwide for laying a green pathway, two significant political entities like European Union (E.U.) and the United States of America (U.S.) are differently approaching climate change with U.S. being absent from various intergovernmental environmental agreements (Carlarne, 2006). It was on 2017 that U.S. withdrew from the Paris agreement, arising concerns to global climate policy (Pickering, McGee, Stephens, & Karlsson-Vinkhuyzen, 2018). Although the U.S. has been called for following unilateral environmental policy (Biermann, 2013), it is not generally accepted that its environmental performance presents significant deviations from other political powers (Böhringer, Garcia-Muros, Gonzalez-Eguino, & Rey, 2017) like E.U. European Union might have participated in mostly every intergovernmental agreement but still, it has faced unexpected events like Volkswagen’s emissions scandal in 2015 (Mujkic & Klingner, 2019).
A clear distinction between their environmental policies has been provided concerning regulation timing, being defined as ex-ante and ex-post for E.U. and U.S. respectively (Asproudis, Khan, & Korac-Kakabadse, 2019). While E.U. is acting proactively providing companies with certain standards, U.S. regulatory policy is mainly driven from corporate activity. There is a call for further research regarding the impact that these differences have on corporate environmental performance (Harjoto et al., 2019). These concerns lead to the following research question:
RQ: How does BODs commitment to participate in international environmental agreements influence corporate environmental performance, under different governmental environmental policies?
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The aim of the study is to provide a better insight into both theoretical and managerial perspectives. Its stimulus is to overcome the existing limitations of current work and offer a more complete idea on how IEAs, utilizing the recent example of the Paris treaty, mobilize BODs and thus the whole organization in environmental-related issues. Τhe world does not have much margin to error in this united effort on mitigating climate change as global warming moves quickly to an increase of 3°C or even more (Falkner, 2016). The paper attempts to broaden the discussion regarding the impact that BODs have on corporate environmental performance and how institutional pressure can influence this relationship. Moreover, the current study contributes to the literature regarding the utilization of institutional theory while trying to identify the reason behind corporate environmental behavior. From a practitioner perspective, this research can be the basis for policymakers regarding the future establishment of environmental targets. Furthermore, the influence among institutions, corporate governance and corporate environmental performance has been clarified through this study. More evidence is provided on the importance of intergovernmental treaties, issuing that policymakers should reconsider the way they regulate and take into consideration their important role on climate change mitigation (Ioannou & Serafeim, 2012). In addition to this, Intergovernmental Organizations (IGOs) and Non-Governmental organizations (NGOs) that are trying to bring states together, have a better insight on the way IEAs are perceived by the board of directors and whether its support on them is reflected to corporate GHG emissions.
The remainder of this paper is structured as follows. In the next section, the theoretical underpinnings of institutional theory, governmental regulations, and corporate environmental performance are presented as well as with the development of the hypotheses. In section 3, the finalization of the dataset, the empirical analysis, and the results are provided. In the fourth section, the theoretical contributions and the managerial implications are being discussed followed by the directions for further research and the limitations being faced. The last section encompasses the concluding remarks of this study.
2. THEORETICAL BACKGROUND
2.1. Institutional theory
Institutional theory warns researchers and policymakers that the way corporations behave and act is highly influenced by the general structure and pressure coming from the external environment in which they operate (Brammer, Jackson, & Matten, 2012). More precisely, organizations are adjusting the way they operate when norms, values, and beliefs that are generally accepted within a state are also being modified (Meyer & Rowan, 1977; DiMaggio
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& Powell, 1983). It is due to the institutional theory that organizations started realizing the important legitimate role they have for society (Scott, 2008). According to this theory, companies are influenced by 3 types of pressure named as coercive, normative and mimetic (Qin, Harrison, & Chen 2019). The source of each pressure is policymakers who regulate and oblige corporations to follow certain rules, public opinion, and competition accordingly.
Several studies have been focused on proving the significance of all types of pressure (Jiménez- Parra, Alonso-Martínez, & Godos-Díez, 2018; Chu, Xu, Lai, & Collins, 2018; Sun, Zeng, Chen, Meng, & Jin, 2019; Latan et al., 2018). More detailed outcomes of these studies are presented in the hypothesis section (2.4).
Institutional theory is disclosing any corporate differences as it supports that companies within an institutional environment are shaping their behavior in line with society’s norms, values and beliefs thus, enabling researchers to examine them as a homogeneous entity (Ortiz-de- Mandojana et al., 2016). It is also fitting better than stakeholder theory due to the fact that stakeholders of a company are shaping their behavior because of pressure coming from company’s external environment like the governmental power applied on them (Kanashiro &
Rivera, 2019). Meanwhile, previous researches being executed in a similar context, have been based on it proving its relevance between corporate behavior and environmental performance.
It has been also used to investigate how the origin of a company influences corporate social responsibility communication, concluding that firms from E.U., compared to those from the U.S., are more significantly prioritizing environmental aspects due to the attention given by both governments and public (Woo & Jin, 2016).
The moderating role of institutional power on environmental firm performance has been already proved significant in previous studies. The influence of the Chief Sustainability Officer on environmental firm performance has been examined under different institutional conditions, proving that this relationship is positively moderated by stringent and more frequent environmental regulations (Kanashiro & Rivera, 2019). In the limitations of that study, the authors claim that the data sample has been limited within a country in order to ensure that firms comply under the same institutional pressures. In order to overcome this limitation, this study is comparing the moderating role that two different institutional contexts, namely E.U.
and the U.S., have on board of directors’ environmental commitment and corporate environmental performance. Another study that has examined the moderating role of institutional theory proved that the relationship between green purchasing and environmental firm performance is positively moderated by coercive pressures (Zhu & Sarkis, 2007) which as described above is a type of institutional pressure and strictly connected with governmental regulations imposed on firms.
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2.2. Governmental regulations
As institutional theory establishes, governmental regulations are strictly connected with corporate performance, both financial and environmental. An example of policymakers’ power, is the meatpacking industry in the U.S. which was operating much more irresponsibly back in the early days of 20th century, changing their habits only after the agricultural department of U.S. regulated more responsibly in order to assure that safety and quality is granted for its citizens (Campbell, 2007). Firms should be pushed from governments to be transparent and clear in terms of following targets set by governments and international environmental organizations, so that they can be easily controlled and monitored regarding their performance (Wang & Sueyoshi, 2018). The importance of environmental regulators is highlighted through this study regarding their influence on corporate boards which in turn influences corporate activities, impacting the whole society.
Policymakers should be determined about what and how to regulate so that companies have a clear picture of not only what is expected from them but also what should be avoided, which can only be achieved by offering them with concrete targets (Guo et al., 2017; Jiménez-Parra et al., 2018). Nevertheless, authors make clear that environmental regulations are not enough for mitigating environmental pollution as firms should realize the importance of the issue and behave in a more volitional way, without being driven by the fear of punishment. Still, governmental environmental regulations can play a major role in corporate behavior. The complexity of shaping corporate behavior lays in the fact that while environmental regulations can be modified immediately, time is necessary for alternating society’s norms, values and beliefs around a specific issue driving companies to totally transform the way they act (North, 1987).
2.2.1. E.U. and U.S. environmental policy
Data collected from European Commission’s joint research center (“EDGAR - Fossil CO2 and GHG emissions of all world countries, 2019 report - European Commission,” 2019) present that in 2015, U.S. counted for 13,12% while E.U. is responsible for 9,16% of global GHG emissions. The combination of both percentages lead to a total of 22,28%. Apart from the environmental footprint, it is believed that the developed world with prior environmental experience should drive developing countries on establishing and improving their own environmental policies (Kuklinska, Wolska, & Namiesnik, 2015). It is more likely that developing world will be driven from practices adopted from developed world, mainly due to the legitimate role that they have acquired through years. E.U. will be considered, as its name attests, as a union due to the fact that key environmental commitments are embraced from all
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its member states (Compston & Bailey, 2016). Additionally, during climate change summits European union’s member states are represented as a whole from E.U. members (Compston &
Bailey, 2016). Both E.U. and the U.S., provide the study with more consistent results as countries with less developed and under construction environmental policies are avoided (Ioannou & Serafeim, 2012).
As referred in the introduction section, E.U. and U.S. have been distinguished as implementing different environmental policies, namely ex-ante and ex-post environmental regulation policies (Asproudis et al., 2019). The former strategy refers to the institutional context where regulations take place before the production of goods and services, setting certain goals to companies whereas the latter concerns the situations where governments let companies operate and produce without any burdens, establishing rules after that point. The authors found out that E.U.
by applying ex-ante regulation policy drives companies to implement green technologies whereas U.S. firms are sacrificing environmental performance in favor of short-term financial prosperity, as long as there is no guidance for them when they establish their environmental policy. The potential of the U.S. is among the most efficient in the world when taking into consideration its technological and financial resources. Brunnee (2004) has presented the paradox of the U.S. as follows. Although the U.S. has the technological and financial capabilities to mitigate its environmental impact, it is still reluctant to unite with E.U., risking negative outcomes for future generations (Brunnee, 2004) and eroding effort of the previous’
(Pavone, 2018). U.S. hesitation to comply with multilateral environmental policies can be connected with the lack of a consistent mitigation plan, applied by its federal regulation (Kemp, 2017). E.U. does not only support united action but also motivates more nations to join this intergovernmental effort. However, the E.U. has been also criticized for its diplomatic skills, hesitating to take over environmental leadership. In Paris summit though, more developing countries participated in the signed agreement, due to E.U.’s efforts to take collaborative action with developing countries (Cross, 2018). An example of such E.U.’s efforts is the establishment of Global Climate Change Alliance between E.U. and African countries aiming to drive them into a more sustainable future (Cross, 2018). Paris agreement indicates the difference between E.U.’s willingness for joint action and the U.S.’s denial to participate. Despite the initial ratification of the treaty, until the author is informed, U.S. will not ratify it.
2.2.2. Paris agreement
This subsection is offered to provide a brief insight into the Paris agreement as it is the treaty used to distill BODs support on cross-national mobilization focusing on climate change mitigation, as it is described in the method section.
The Paris agreement has set a long-term goal of mediating the industrial contribution on climate
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change by holding the temperature increase below 2 ◦C while putting efforts to confine it at 1.5
◦C (Liu, Wang, & Zheng, 2017). The desired outcome of this relation is that developed countries aiming for significant reductions in GHG emissions will be an example for other countries to follow them and set high targets as well (Falkner, 2016). What could be considered as pioneering about Paris agreement is the number of United Nations member states (195) that participate in it (Pavone, 2018). Even before being entered into force, Paris treaty has succeeded in terms of building awareness among politicians, civilians, and corporations (Falkner, 2016).
Even authors that are rather than pessimistic regarding such global agreements have not avoided possible positive outcomes from Paris Agreement due to a newly established measure of letting states to set their own Intended Nationally Determined Contributions (INDC) (Almer &
Winkler, 2017). This might have also led to the increased numbers of participated countries on it (Falkner, 2016). There are already some interesting results regarding Paris treaty and the intended nationally determined contributions (INDC) that were introduced in it. Focusing on the two political entities that are examined in the current study, U.S. found that should lower their annual carbon emission rates two times in order to achieve its INDC that had been set from the previous U.S. government, while E.U. could even continue operating at the same levels as the current moment that the study had been conducted (H. Wang & Chen, 2019).
2.2.3. International Environmental Agreements (IEAs)
International environmental agreements are the most significant example of cross-national negotiations to mitigate environmental pollution. Paris agreement is considered as one of them.
The efficiency of IEAs has not been generally accepted. On the one hand, there is proof that IEAs are effective in controlling and reducing environmental pollution (Núñez-Rocha &
Martínez-Zarzoso, 2018). The authors studied the influence of Rotterdam and Stockholm convention on the materials and goods traded between countries from OECD (organization for economic co-operation and development) to non-OECD countries. More precisely, a reduction of 7% and 16% for importing hazardous chemicals and lasting organic pollutants had been found respectively, after the implementation of both agreements (Núñez-Rocha & Martínez- Zarzoso, 2018).
As it concerns the Kyoto Protocol, it has also arisen controversial opinions regarding its efficiency. Almer & Winkler (2017) support that Kyoto Protocol in the examined European countries which had signed it did not lead to significant reduction in CO2 emissions, even compared with countries that had not committed to it. Contrastingly, another study concluded that firms that had participated in Kyoto Protocol present a 7% CO2 level of reduction (Grunewald & Martinez-Zarzoso, 2016). The efficiency of Paris agreement is still to be examined in more detail through evaluating tangible outcomes that have been set on it.
When a superpower like the U.S. is not participating in such international environmental
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agreements, other nations are being discouraged in terms of taking environmental action and participate on them (Pickering et al., 2018). As proposed in the literature, consequences regarding the way non-parties of intergovernmental agreements will treat environmental sustainability should be also taken into consideration from policymakers, especially when the non-parties are significant global powers (Kemp, 2017). Unilateral environmental activities cannot significantly impact climate change mitigation, as united effort is required in order to efficiently handle with it.
2.3. Corporate environmental performance (CEP)
Studies with the context of corporate environmental performance started concerning researchers during the last three decades (Dragomir, 2018). The proposed definition of Dragomir (2018) regarding corporate environmental performance is as follows: “Corporate environmental performance is a measure of environmental impact, resource consumption, and related financial elements, along with the efforts towards the reduction of such impact and the implementation of preventive measures”. Learning from Green International Brands, when assessing their environmental sustainability, they categorize criteria like carbon emissions, level of recycled materials, waste of products and both energy and water consumption (Caniato, Caridi, Crippa, & Moretto, 2012). Therefore, environmental KPIs can be either distinguished as materials or emissions, effluents, and waste. Another classification than the one provided above have categorized CEP into 3 categories, namely “environmental impact, regulatory compliance, and organizational processes” (Hassan & Romilly, 2018). Environmental impact is the actual pollution caused by corporate activities, both directly and indirectly. In this study, corporate environmental performance will be defined as the direct and indirect emissions coming from corporate activities and more precisely, GHG emissions as analyzed more detailed in the next paragraph.
Previous studies refer to CEP in terms of 3 types of emissions (Ioannou, Li, & Serafeim, 2016;
Liesen, Hoepner, Patten, & Figge, 2015; Wang & Sueyoshi, 2018). Firstly, scope 1 emissions have been characterized as the direct emissions coming from company’s assets that are polluting the environment (Ioannou et al., 2016). An example of scope 1 emissions is firm’s vehicles, boiler, and furnace (Wang & Sueyoshi, 2018). Emissions coming from generated
“electricity, heat, steam and cooling” are defined as scope 2 (Ioannou et al., 2016). For example, when companies purchase energy from an electricity company, the emissions of that company to generate the needed electricity are counted as scope 2 emissions of the company asking for energy (Wang & Sueyoshi, 2018). Scope 3 includes all the indirect emissions deriving from company’s actions, excluding scope 2 emissions (Ioannou et al., 2016). The transportation on
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behalf of companies that take place with means of transport that are not owned by the company, is a clear example of scope 3 emissions (Ioannou et al., 2016). In this study, focus is given in scope 1 and scope 2. Both scopes are offering a consistent summary of emissions resulting from corporate activities and leading to climate change deterioration (Liesen et al., 2015). As it concerns scope 3 emissions, they have not been extensively studied as their measurement is more challenging for firms and usually, they do not count them when they set targets (Wang &
Sueyoshi, 2018).
2.3.1. CEP and corporate governance
In this study, corporate governance is used in order to examine the relationship among companies’ internal stakeholders like board of directors and how their perception and behavior are affected by different institutional pressures applied to them (Aguilera & Jackson, 2010).
Papers related to BODs role on shaping corporate strategy might have been increased from the early 1980s (Pugliese et al., 2009), but the way it influences the performance of the firm, has been significantly grown during the last decade (Naciti, 2019). As long as corporate performance might also include financial achievements, it should be clarified that this study will only focus on corporate environmental performance. Deriving from institutional theory, governments and regulators are crucial for affecting corporate’s governance activities, presenting differences due to the level of pressure applied to them (Ortiz-de-Mandojana et al., 2016).
A study on Italian firms has found a positive relationship between BODs characteristics and CEP as it concerns board independence, women's presence and a special corporate social responsibility committee on it (Cucari, Esposito De Falco, & Orlando, 2018). Moreover, corporate management members are seriously facing environmental aspects when strict and frequent governmental regulations are applied to them (Qin et al., 2019). This perception could be assigned to the growth of a certain competitive environment because of more companies committing with certain standards. Corporations will face environmental sustainability more intensively when a sustainable committee is appointed within the company, handling with environmental issues (Ortiz-de-Mandojana et al., 2016). The formulation of a sustainable committee could be initiated from BODs as they shape corporate behavior and clarify the priorities within the company. Contrary to authors’ expectation, The existence of Chief Sustainability Officer (CSOs) has not been proved vital for improving corporate environmental performance but being valuable only under a stricter regulatory environment than in a looser one (Kanashiro & Rivera, 2019). A significant requirement for firms to achieve an at least adequate environmental performance is corporate environmental strategy focused on proactive practices like investing in new technologies (Dragomir, 2018) which is easily accomplished
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through top-level corporate governance and thus, board of directors.However, the way top- level managers are perceiving environmental issues has been mainly focused on their general perception of the need to take environmental action but none of them had been defined as their support on intergovernmental agreements signed by their firm’s country of origin. Therefore, the differentiation of this study is on the level of corporate governance focusing on BODs perception on environmental issues translating it into their support on global mobilization for putting brake on environmental pollution.
2.4. Hypotheses and conceptual framework
In this sub-section, the hypotheses are developed as well as with the constructed conceptual model.
When the government regulates with respect to environmental pollution, corporations are rather motivated than discouraged to implement environmentally friendly practices (Jiménez-Parra et al., 2018; Chu et al., 2018). Meanwhile, corporations behave in a more environmentally friendly way when the community operating in, is taking sustainability seriously and is highly informed about possible damage coming from untrustworthy firms (Sun et al., 2019). In addition, organizations are not only conforming to environmental regulations for protecting their legitimacy, but also for prospering by breaking the competition (Colwell & Joshi, 2013). The importance of regulators is highlighted due to the fact that certain goals are provided to corporations in order to achieve effective results on reducing GHG emissions (Haque & Ntim, 2018). Therefore, the expected result is that when the board of directors supports such intergovernmental agreements, their behavior has been shaped through institutional pressures applied to them, leading to better corporate environmental outcomes.
To be more precise, managers’ commitment to issues related to environmental sustainability has been proved vital for awakening the whole corporation (Latan et al., 2018; Pérez et al., 2007). In addition, how firms’ board of directors is composed, is crucial for determining firms’
performance in various contexts including environmental aspects (Johnson et al., 2013). The higher the willingness of the managers to transform firm’s philosophy into more sustainable, the better the environmental performance of these companies will be (Latan et al., 2018). That study used a sample of Indonesian firms where corporate environmental performance is not yet highly prioritized (Latan et al., 2018). To overcome the particularities of such environments, firms operating in E.U. and the U.S. will be examined in this study. With respect to the prior literature discussed regarding the positive relationship between managers’ commitment to environmental issues and environmental firm performance, the first hypothesis has been formed taking into consideration BODs power on shaping corporate behavior.
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H1: Board of directors’ support on international environmental agreements is positively influencing corporate environmental performance
Literature has agreed on defining U.S. environmental policy as unilateral (Brunee, 2004;
Carlarne, 2006). Even concerning Kyoto Protocol, U.S. never followed it in spite of its initial commitment to participate (Wang & Sueyoshi, 2018). The current president of the U.S., likewise announced its withdrawal from Paris treaty, stating that “environmental policies should not put financial barriers on governments” (Pavone, 2018). This perception could be connected with the general concept that investments in attenuating climate change are mostly focusing on long-term outcomes without providing firms with significant short-term financial profit (Haque & Ntim, 2018). When combining the official statement of the U.S. President with the fact that governmental regulations incentivize companies to invest in sustainable strategy, it could be therefore hypothesized that companies operating in U.S. are slightly supporting such treaties. On the other hand, European Union from 1990 on, has been characterized as the leader on environmental policies, including intergovernmental environmental agreements concerning climate change, global warming and environmental pollution in general (Cross, 2018; Kelemen, 2009; Manners, 2006). Resulting from the above facts, E.U. has participated in the majority of IEAs while at a federal level, U.S. governments have not supported such treaties. It can be supported that firms operating in E.U. are more familiar with all types of institutional pressures whereas American firms are less accustomed to binding targets set by federal government.
Therefore, this study will consider the institutional pressure applied to firms regarding environmental issues, stronger in E.U. than in U.S.
H2: The relationship between BODs commitment to environmental issues and corporate environmental performance is stronger for companies complying with E.U.’s rather than U.S.’s environmental policy
Conceptual model
+
U.S. firms (+) E.U. firms (-)
BODs support on intergovernmental
environmental agreements
Environmental firm performance
U.S. and European firms
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3. METHODOLOGY
3.1. Sample and data collection
This section describes the method used to test the above conceptual model (section 2.4.). An explanatory survey research has taken place in order to test the proposed hypotheses. The general concept of corporate governance and corporate environmental performance has been already studied in the literature, leading to the conduction of explanatory survey research (Karlsson, 2016). Data collection has been carried out using the Carbon Disclosure Project (CDP) in order to examine the hypotheses described in section 2.4. CDP is a non-profit organization collaborating with companies in order to track and measure their environmental impact in order to eliminate it (“About us - CDP”). CDP has been found in 2000, thus completing two decades by the date that the paper is being written, by British investors aiming to incentivize corporations to reduce their impact on climate change (Li, Huang, Ren, Chen, &
Ning, 2018). Its established annual reports have been extensively used in studies investigating relations among corporate governance, behavior and environmental performance (Ioannou et al., 2016; Kouloukoui et al., 2019; Li et al., 2018). It has been characterized as the most complete among its kind, concerning the provision of “direct, cross-sectional and large-scale data” (Ioannou et al., 2016). In this study, data are distilled for companies from U.S. and E.U., from different industries as well as with reported GHG emissions. Among others, CDP offers a comprehensive dataset as guidelines are provided to the respondents about what to include and which framework to follow when answering to the questions (D. Wang, 2017). As proposed in the theory section, corporate environmental performance is being conceptualized as GHG emissions. Throughout the years, CDP has achieved to offer transparent information regarding corporate emissions in order to enable companies to handle with them more efficiently through GHG emissions (Delmas, Nairn-Birch, & Lim, 2015). More details about the CDP questions that have been utilized, are presented in the next paragraph.
It was necessary to build a sub-sample that fit in this study with respect to the proposed research question. Firstly, questionnaires from 2015 and 2017 have been matched in order to identify those companies that had participated in both of them. This match was necessary as the independent variable of the study exists in the 2015 questionnaire while the question for
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reporting the emissions has been distilled from the one of 2017. In detail, 2107 companies had participated in the 2015 project while 2883 in the one of 2017. When searching for companies that participated in both questionnaires, the sample was 1085 companies from all over the world. The observations were segregated depending on the country of origin as the ones needed were those from E.U. and U.S. After removing companies operating in other regions than E.U.
and U.S., the sample was 644 companies, 266 from the E.U. and 378 from the U.S. Then, the questions needed for testing the proposed hypotheses have been checked for missing data. As it concerns the emissions data, 215 companies had not reported either one type of emission or even both of them. It should be remarked that reported GHG emissions were required for both 2015 and 2017 questionnaires in order to create a variable concerning the difference in emissions between these years. The reason behind it will be further presented in the following sections. The full dataset with European and American firms that answered the questions related to both the independent and the dependent variables in the CDP questionnaires counted 429 companies. In the next section, the need for control variables will be described more extensively. In order to find the data for the control variables, other datasets like Compustat, Boardex and Fortune lists have been utilized. The data for the control variables have been collected for the year 2017, in accordance with the environmental performance data that have been collected from the CDP questionnaire of 2017. After trying to find data for these 429 companies, the final dataset is reported as 226 companies from which 116 are from countries of E.U. and 110 are from U.S. It was of high importance for the study to create a concrete sample regarding the utilized variables.
A small reference will be given to scope 3 emissions that have been introduced in the theory section. They have not been included in the study as many companies have failed to measure this type of emissions. To give an insight, when adding the scope 3 emissions for the current dataset of 226 companies, it nearly halved into 110 companies. Apart from the fact that a dataset of 110 companies would have been relatively small, two more reasons led to this choice of not including scope 3 emissions in the analysis. Companies find difficulties to measure scope 3 emissions which might lead to inaccuracy of the data and yet, they are not widely connected with corporate targets when establishing their corporate environmental policy (Wang &
Sueyoshi, 2018).
3.2. Measurement of variables
Independent variable
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BODs support on global environmental action will be measured through the CDP of 2015. The question is constructed as follows: “Would your organization’s board of directors support an international agreement between governments on climate change, which seeks to limit global temperature rise to under two degree Celsius from pre-industrial levels in line with IPCC sce- narios such as RCP2.6?”. The support on international environmental agreements should be identified which led to the operationalization into two categories. Number 1 will be assigned to firms who positively responded, whereas 0 to firms that replied negatively or by “no opinion”.
As the concept of this study is to investigate the effect that the support on international envi- ronmental agreements has on corporate environmental performance, only companies who re- plied with “yes” will be taken into consideration as supporters of such agreements. The differ- ence between respondents who answered “no” and “no opinion” will not be considered signif- icant as in both ways, it means that corporate board is either reluctant or negative to comply with IEAs. As BODs is considered to be the highest level of management within a company, its support on IEAs can be interpreted as the general environmental behavior within a firm (S.
Wang et al., 2018). When the corporate board supports such agreements, it is expected that the whole organization will behave accordingly.
Dependent variable
As it concerns the environmental firm performance, the CDP of 2017 has been used in order to provide environmental-related results after the Paris agreement had been signed from countries.
Even though it had not been already activated, corporations had to change their environmental strategies in order to respond to the forthcoming institutional changes. In 2017’s report, com- panies were asked to present their scope 1 and scope 2 GHG emissions for that specific year.
Taking into consideration that there is no generally accepted way to measure environmental firm performance (Latan et al., 2018), it will be quantified through GHG emissions, providing the research with a rational and inviolate measurement regarding “time, companies and nations”
(Hassan & Romilly, 2018). GHG emissions have been considered an important step towards the comprehension of companies’ potential to handle with climate change (Kılıç & Kuzey, 2019). GHG emissions is also considered as an accurate measurement of companies’ and coun- tries’ contribution to climate change (Yunus et al., 2016). As discussed in the theory section, climate change mitigation is a global issue asking for united effort thus, the choice of an envi- ronmental performance that has no borders across nations has been suggested. In addition, when governments and organizations are putting efforts to promote climate change mitigation, the reduction of GHG emissions is common on establishing certain targets (Tidy, Wang, & Hall, 2016). Two questions about direct emissions from corporate activities (scope 1) and emissions coming from indirect energy-related activities of firms (scope 2), have been used. Both emis- sions are calculated in metric tonnes CO2e. Lower levels of GHG emissions are reflecting better
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environmental performance. The combination of these scopes on measuring corporate environ- mental performance is providing studies with a broad perspective of corporate footprint on cli- mate change (Hassan & Romilly, 2018).
Moderating effect
In order to classify European and American firms, the methodology of another study will be followed (Dixon-Fowler, Slater, Johnson, Ellstrand, & Romi, 2013). The authors have used the headquarters of firms as the distinction among them. The difficulties of defining the origin of a firm is noticed especially in today’s society where the vast majority of corporations have integrated a significant degree of internationalization within them (Dixon-Fowler et al., 2013;
Etiennot, Vassolo, Diaz Hermelo, & McGahan, 2017; Hashim, Mahadi, & Amran, 2015). The corporate environmental performance is influenced by the regulations implied in the country that a company is originated as well as with the values, norms, and beliefs within this state (Dixon-Fowler et al., 2013). As a result, firms’ origin will be determined from corporate headquarters location. Dixon-Fowler et al. (2013) are providing an example as a reasoning for the described categorization. Although Ford Motor Company owns facilities and operates all over the world, it is yet considered as U.S. firm while Toyota might have production facilities in the U.S. but still perceived as a Japanese firm. This example presents the importance of legitimacy and social perception that shape corporate activities as a company that operates globally will still be perceived as a company originated by its headquarters. Hashim et al. (2015) in order to investigate the moderating role of cross-national differences in Gulf Cooperation Council (GCC) countries, classified the firms regarding their origin. Most importantly, the strategy of a firm is likely to be shaped by corporate governance which is mainly influenced by the institutional environment of its headquarters (Ioannou & Serafeim, 2012). After all, a dummy variable has been created in order to check the moderation effect of companies’ origin where 1 has been appointed to firms from the U.S. and 0 for those originated in countries of the E.U.
Control variables
Four control variables have been used in order to prevent confounding outcomes from the computations. Total assets, the number of employees, the board size and the industry that a firm operates in, represent the explanatory variables in this study. Looking in the literature, they have been identified significant with respect to the environmental performance of a company.
Therefore, they will be included in the analysis to isolate the effect of the examined independent variable on corporate environmental performance. Several papers have proved the influence that firm size, firm’s industry and board size have on corporate environmental performance
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(Golicic & Smith, 2013; Saeidi, Sofian, Saeidi, Saeidi, & Saaeidi, 2015; Hashim et al., 2015;
Kanashiro & Rivera, 2019; Naciti, 2019; Ortiz-de-Mandojana et al., 2016). In the current study, the differences between the size of the firms need to be monitored concerning their GHG emissions and their potential opportunities to invest in green practices. The environmental firm performance might present deviations due to firm characteristics like financial prosperity and hold of resources (Homroy & Slechten, 2017). In order to measure firm size, total assets and the number of employees have been utilized from lists containing secondary data like Compustat and Fortune lists. The published Fortune list for 2017 has been utilized for both European and American companies regarding the assets and the number of employees. The Fortune 500 (consisting of 1000 companies) has provided data for companies from the U.S.
while for E.U. companies, the Fortune 500 Global has been employed. The Fortune list appears as a source of secondary data in prior literature (Ciocirlan & Pettersson, 2012; Glass, Cook, &
Ingersoll, 2016). However, these lists could not fulfill the needs of this study regarding the sample making the need for supplementing the dataset. Compustat dataset has been used in accordance with previous studies (Glass et al., 2016; Naciti, 2019). Compustat is a large-scale dataset which ensures a high level of credibility and provides internal consistency in studies (Ellram & Tate, 2016). Compustat Global and Compustat North America of 2017 datasets have been available through the Wharton Research Data Services (WRDS), providing with total assets and number of employees for companies that were not included in the Fortune lists for 2017. Total assets have been measured in millions of U.S. Dollars. When companies outside the U.S. have provided their total assets in a different currency, they have been transformed to USD according to the average exchange rate of 2017 between USD and the currency of the examined company.
As the question for measuring the independent variable concerns BODs perception of IEAS, the board size will be taken into account in order to control the statistical outcomes. In previous studies, board size has been found as a driver for environmental sustainability within a company, influencing the direction that a company follows (Chams & García-Blandón, 2019).
More specifically, the potential impact of board size on shaping corporate behavior derives from the fact that larger boards need better coordination skills as communication among more people is more challenging than within a smaller board of directors (Mertzanis, Basuony, &
Mohamed, 2019). Therefore, a larger board size might lead to worse environmental performance due to the difficulties in communication within it (Haque, 2017). The question for the independent variable of the study concerns board’s support on IEAs which might have been influenced by the fact that a board is too large and the communication within it regarding the integration of environmental policies might be problematic. In accordance with previous studies, information from BoardEx has been derived in order to identify the number of directors
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on board during 2017 (Harjoto et al., 2019; Homroy & Slechten, 2017). Access in the BoardEx dataset of 2017 has been also gained through the WRDS.
The risk industry has been also used for controlling the output of the regressions. The classification has been made according to the industry that a company operates in. High risk has been considered the manufacturing, transportation and fossil fuel industries while low risk refers to the companies providing services and consultancies.
3.3. Data analysis
The final constructed dataset has been analyzed through IBM SPSS Statistics package 25. In order to enter the data in the SPSS, two dummy variables were created for company origin and the industry risk of each company. The dummy variable refers to the origin of the company, named ‘U.S.”, appointing 1 to those whose headquarters have been identified in U.S.A. and 0 to those originated in E.U. The second dummy variable has been named as high-risk industry referring to the pollution risk of the industry that a company operates, appointing 1 to industries considered high pollutants and 0 to those that are considered low pollutants. Scope 1 and scope 2 emissions, total assets, and the number of employees have been log-transformed in order to execute the regressions and avoid skewness throughout the data (Delmas et al., 2015). Total assets have been measured in millions of U.S. Dollars and the number of employees in thou- sands of people. Apart from the emissions of 2017, emissions reported from companies in 2015 have been also collected in order to calculate the change in the emissions between these years.
After collecting performance data for both years, two new variables have been created named as scope 1(%) and scope 2(%). The way they have been calculated is by subtracting the emis- sions of 2015 from the emissions of 2017, dividing this amount by the emissions of 2015. The formula can be described as follows: (emissions 2017-emissions 2015)/emissions 2015.
The reasoning behind these new variables is the identification of any possible significant dif- ferences from the year that Paris agreement had been signed and the latest CDP questionnaire examined, which is the one of 2017. The two new variables have been entered into the SPSS as numbers. Any possible change on the GHG emissions after Paris treaty can provide further insight on how organizations responded to the call for climate action.
At first, 4 linear regressions have been executed in order to test the influence of the support on international environmental agreements in the corporate environmental performance. 4 different measurements regarding corporate emissions have been used, scope 1 emissions of 2017, scope 2 emissions of 2017, the difference of scope 1 emissions, and the difference of scope 2 emissions. 4 models have been created for these regressions. Then, the SPSS file has been split into two subgroups, namely for U.S. and E.U. companies, in order to test the proposed
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moderation. 4 more regressions similar to the ones described above have been executed. The output of the regressions has been divided according to the dummy variable that has been created regarding companies’ origin. The first output has been appointed to the E.U. companies (U.S.=0) and the second output concerns the U.S. companies (U.S.=1). The regressions have been made for all (4) environmental performance measures as described for the direct effect. In order to test the reliability of the outcomes, another model of testing the proposed hypotheses has been utilized, namely the process model 1 of Andrew Hayes. The output of the process model 1 is provided in the appendix section. In the following section, the 8 linear regressions are explained further as well as with the tables of the results. The control variables have been included in all the models in order to provide the study with more accurate results and control the variance among the sample (Delmas et al., 2015).
3.4. Results
In this section 4 tables are provided in order to justify the relationships among the proposed variables. Tables 1 and 2 present the results regarding scope 1 and scope 2 GHG emissions for 2017, including the moderation variable. Tables 3 and 4 display the results of the analysis regarding the difference in scopes 1 and 2 GHG emissions between 2015 and 2017.
From tables 1 and 2 it can be derived that BODs support on international environmental agreements leads to lower GHG emissions. More specifically, model 1 and model 3 that refer to scope 1 and scope 2 GHG emissions indicate that the relationship between BODs support on IEAs and GHG emissions is significantly negative (b=-0,125, p=0,013 and b=-0,157, p=0,001).
From table 3 and model 5, the same relationship has been found indicating that the scope 1 GHG emissions have been reduced between 2015 and 2017 when corporate board was supporting international environmental agreements (b=-0,082, p=0,040). Table 4 and model 7 does not present any significance between the support on IEAs and the difference in scope 2 emissions between 2015 and 2017. Nevertheless, the results regarding BODs support on international environmental agreements and the corporate GHG emissions support H1. Thus, BODs support on IEAs is positively related to corporate environmental performance.
Considering the moderation variable, intriguing outcomes are presented in tables 3 and 4 regarding the difference of scope 1 and scope 2 GHG emissions between 2015 and 2017. On table 3 and model 6, E.U. firms found to negatively moderate the proposed direct effect (b=- 0,215, p=0,034). Similarly, table 4 and model 8 present significant interaction for firms from E.U. (b=-0,183, p=0,076). Although no interesting results have been found for the moderation regarding scope 1 and scope 2 GHG emissions of 2017, it can be derived that E.U. firms moderated the proposed relationship between BODs support on IEAs and corporate GHG
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emissions. Thus, H2 is also supported due to the fact that the relationship between BODs support on IEAs and corporate environmental performance is positively moderated by firms from E.U.
In order to visualize the moderation, graphs 1 and 2 are provided below. The blue line refers to companies from E.U. while the red line indicated the U.S. firms. On the x-axis, the support on international environmental agreements is measured with the support of them being defined as 1. On the y-axis, the difference in GHG emissions between 2015 and 2017 is presented. As shown in the graphs, the moderation is valid for the blue line which indicated the European firms. The line is negative as long as the GHG emissions were reduced between the two examined years. The graphs can be interpreted as follows. The origin of the firm moderates the relationship between BODs support on IEAs and corporate environmental performance. As H2 suggests, when firms are complying under the institutional environment of the E.U., the relationship between BODs support on IEAs and corporate environmental performance is positively moderated.
Variables Model 1 (scope 1) Model 2 (moderation)
Scope 1 2017 N=226 U.S. (N=110) E.U. (N=116)
High risk industry 0.351 (0.000) 0.315 (0.000) 0.360 (0.000) Total assets 0.192 (0.005) 0.132 (0.214) 0.248 (0.013) Employees 0.415 (0.000) 0.406 (0.001) 0.397 (0.000) Board size 0.094 (0.123) 0.169 (0.058) 0.083 (0.383)
Support -0.125 (0.013) -0.111 (0.155) -0.148 (0.045)
R2 0.517 0.570 0.503
b-coefficient reported; p-value in parentheses Table 1. scope 1 emissions of 2017
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Variables Model 3 (scope 2) Model 4
Scope 2 2017 N=226 U.S. (N=110) E.U. (N=116)
High risk industry 0.033 (0.457) 0.046 (0.452) 0.021 (0.768) Total assets 0.347 (0.000) 0.334 (0.001) 0.294 (0.003) Employees 0.297 (0.000) 0.393 (0.001) 0.281 (0.004) Board size 0.165 (0.004) 0.049 (0.561) 0.266 (0.005) Support -0.157 (0.001) -0.097 (0.193) -0.139 (0.053)
Adj. R2 0.585 0.608 0.529
b-coefficient reported; p-value in parentheses Table 2. scope 2 emissions of 2017
Variables Model 5 (scope 1%) Model 6
Scope 1% difference N=226 U.S. (N=110) E.U. (N=116) High risk industry 0.043 (0.526) -0.088 (0.338) 0.048 (0.630) Total assets -0.217 (0.023) -0.491 (0.002) -0.090 (0.505) Employees 0.085 (0.413) 0.530 (0.003) 0.014 (0.920) Board size 0.001 (0.990) -0.077 (0.544) -0.005 (0.967) Support -0.146 (0.040) 0.014 (0.901) -0.215 (0.034)
Adj. R2 0.042 0.112 0.067
b-coefficient reported; p-value in parentheses
Table 3. difference in scope 1 emissions between 2015 and 2017
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Variables Model 7 (scope 2%) Model 8
Scope 2% difference N=226 U.S. (N=110) E.U. (N=116) High risk industry 0.013 (0.851) -0.075 (0.438) -0.009 (0.928) Total assets -0.128 (0.183) -0.092 (0.564) -0.013 (0.927) Employees 0.054 (0.606) 0.151 (0.413) 0.015 (0.915) Board size 0.073 (0.401) 0.006 (0.966) 0.046 (0.726) Support -0.082 (0.252) -0.058 (0.617) -0.183 (0.076)
Adj. R2 0.015 0.027 0.036
b-coefficient reported; p-value in parentheses
Table 4. difference in scope 2 emissions between 2015 and 2017
Graph 1. Moderation effect for difference in scope 1 emissions
