Project Materials

CHAPTER ONE

INTRODUCTION

1.1. BACKGROUND OF THE STUDY

Corporate environmental investments have traditionally been deemed to be an unnecessary cost to companies, with investors against their undertaking because of perceived no or insignificant returns. Hitherto, investment in corporate social responsibility (CSR) as a global phenomenon has remained a thriving corporate governance concept and management strategy in most multinationals (Peng & Yang, 2014; Amin-Chaudhry, 2016).

It keeps attracting the interest of a vast number of scholars, economists, governmental and non-governmental organizations, and the public as a result of industrial growth and economic prosperity of many nations globally (Abiodun, 2012; Adeyemi & Ayanlola, 2014; Harpreet, 2009; Uadiale &Fagbemi, 2012; Uwuigbe & Uadiale, 2016).

Documented evidence has shown that investments in corporate social responsibility have the potentials of making positive contributions to the development of society and businesses (Harpreet, 2009; Helg, 2015; Wahba & Elsayed, 2015; Hategan &Curea-Pitorac, 2017).

However, recent research and literature highlight financial benefits accruing from environmental investments. In recent years, there has been a growing demand for companies to improve their sustainability practices, environmental and good corporate citizenship initiatives (Brown, Malmqvist & Wintzell, 2016). According to Streimikiene, Navikaite and Varanavicius (2016), mounting pressure from stakeholder groups has led top executives of many companies to implement corporate environmental investments (Streimikiene et al., 2016).

Implementing environmental-related investments enable businesses to give back to both the environment and community in which they operate (Depoers, Jeanjean & Jérôme, 2016). Presently, environmental matters have received a much higher priority in business decisions with management having to incorporate environmental variables in business operations.

In support of this view, Brown et al. (2016) reveal that companies in the United States of America (USA) spent more than $120 billion to comply with environmental laws and regulation in addition to several billion spent on research and development. Additionally, Strezov and Evans (2016) state that the top 10 American firms are now spending over 5 billion annually on research and development.

In expending huge amounts on compliance with environmental laws and regulation, companies can voluntarily reduce their pollution levels beyond compliance (Brown et al., 2016). The obvious question for any investor would be: is there any return for the investment in carbon emission reduction and hazardous solid waste?

Literature is inconclusive about the effect of corporate environmental investment and financial performance of listed firms. According to Strezov and Evans (2016), corporate investments in environmental technologies have traditionally been considered to drain a firm’s resources, creating an inherent conflict between environmental and financial performance.

Conversely, Christopher, Hutomo, and Monroe (2013) argue that good corporate environmental performance attracts resources to the firm, including better quality employees and expanded market opportunities.

Dimowo (2010) observed that companies in pursuit of profits can do great social harm and the environment suffers, thus, there is an emphasis for a meeting point between the need for environmental management and corporate objective of profit maximization. In this regard, the need for environmental cost has become the concern and focus of nations and responsible corporate managements (Okoye & Ngwakwe, 2004).

More recently, the relationship between corporate environmental investment and financial performance has attracted increasing attention in the empirical literature as well as in the business community. The traditional perspective viewed environmental expenditures, whether on waste treatment and removal or pollution prevention strategy, as a drain on firm resources and a commitment of funds to non-productive uses (Palmer et al. 2010).

However, a growing movement argues that pollution prevention and the associated re-evaluation of a firm’s production processes creates opportunity for the firm to strategically alter production (e.g., to reuse/recycle raw material, substitute less environmentally harmful materials, etc.) and translate innovation into competitive advantage (Porter and van der Linde 2010).

It is further argued that firms with better environmental records are more attractive investments due to the lower perceived compliance costs and liabilities (Konar and Cohen 2009). Thus, the empirical literature has evolved into examining the relationship between environmental and financial performance, hypothesizing that poor (good) environmental performance is associated with decreased (increased) financial performance.

Several motivating factors have generated the recent interest in this topic including the growing movement towards corporate “beyond compliance” actions, or the voluntary reduction of emissions beyond legal limits, and the adoption of riskier proactive and preventative environmental policies that seek to alter production techniques and to adopt innovative, clean technologies.

This research agenda has also gained exposure due to the increasingly popular socially/environmentally responsible investment approaches and consumer demand for “green products”. Previous research addressing the relationship between financial and environmental performance (e.g., Marlin 1972; Chen and Metcalf 2010; Hart and Ahuja 2013) has not produced a clear answer and this lack of consensus in literature can be attributed to several factors.

First, the cost of complying with environmental regulation can be significant and detrimental to shareholder wealth maximization. However, a firm that can effectively control pollution might also be able to effectively control other costs of production and hence enhance shareholder wealth. Second, successful firms can afford to spend more of its resources on promoting more sustainable uses of resources.

Conceivably, a company that achieves a good environmental performance gains an advantage over its competitors while for some companies environmental compliance is just an extra cost with no added value. It is based on this background, that this study is intended to look into the effects of environmental investment on the financial performance of oil and gas firms listed in Nigeria.

Therefore, this study aims to demystify the above inconclusiveness by empirically examining the correlation between corporate environmental investment and financial performance of listed oil and gas firms in Nigeria.

1. STATEMENT OF PROBLEM

Recently many firms have assembled programs in environmental investments to counter the claims that organisations only emphasize on profit maximisation. These endeavours to build up the Environmental Responsibility of a Company constitutes a means to bring a quantified proof of operational effects on the Environment by firms, in order to perfect the decision process, to legitimize the Organization towards its Environment, or still to enhance the Organization (Gray 2012).

Consequently, late subjective and quantitative surveys attempt to total the discoveries and researchers contended that there are circumstances where beyond compliance behaviour by firms is a win-win for both the environment and the firm (Nelson 2013; Panayotou and Zinnes 2013; Esty and Porter 2014).

Baridam (2010) contended that being socially mindful by associations would prompt mutual satisfaction by both the organization and its immediate environment through interaction. Though, Justin and Wadike (2013) noted that establishment of organizational objectives and corporate strategies should involve the immediate environment in which it operates so as to deliberately address the feasible complexities going from political, social, monetary and environmental issues.

Numerous companies in developing countries such as Nigeria carry on in a way that proposes that they can accomplish corporate objective regardless of the possibility that environmental and social responsibility are trampled upon.

It is this factor that motivated this study into searching for companies that exhibit some elements of sustainability and how this may impact corporate performance. Most organisations concentrate on protecting brand and reputation and not the people or communities in which corporations operate.

Hence this study will focus on global workforce and local communities in relation to environmental investments of organisations. Customarily, just extensive multinational organizations have the ability to put resources into staff and community however there are a considerable measure of organizations that are not so huge yet does that mean doing great and adding to social great isn’t essential to them?

Human social responsibility implies that association of all sizes, as convener of individuals, will take their lead from employees and their individual human social contracts. The existing hundreds of scientific attempts of finding a generally valid answer to this complicated question date back 40 years.

Frequently, they experience the ill effects of complex interactions, inappropriate estimation models or insufficient data which lead to inconclusive results (Elsayed and Paton 2016; Günther et al. 2012). Although environmental investments are welcome by society, they are not as appealing to firms, as one may anticipate especially in Nigeria where companies are still far behind in understanding and applying environmental accounting.

The fundamental reason is that this sort of investments requires an initial significant input of money, while the majority of those are treated as irreversible investments under output price uncertainty.

A substantial number of firms are as yet careless about their environmental and social responsibility and those that voluntarily take part do not focus on global workforce and local communities. Based on this, the study examines the relationship between environmental investments and oil and gas firms’ financial performance in Nigeria.

1.3. AIMS AND OBJECTIVES OF THE STUDY

The major aim of the study is to evaluate the effect of corporate environmental investment on financial performance of oil and gas companies listed in Nigeria. Other specific objectives are as follows;

1. To examine the influence of external environmental investments on the performance of listed oil and gas firms in Nigeria.
2. To examine the effect of corporate environmental investment on Return on Assets (ROA) of listed Oil and Gas firms in Nigeria.
3. To examine the extent to which corporate environmental investment affects Return on Equity (ROE) of listed Oil and Gas firms in Nigeria.
4. To examine the relationship between internal environmental investments and financial performance of listed oil and gas firms in Nigeria.
5. To examine the difference in profitability of the environmentally conscious firms and environmentally non-conscious firms in Nigeria.

1.4. RESEARCH QUESTIONS

1. How is the influence of external environmental investments on the performance of listed oil and gas firms in Nigeria?
2. What are the effects of corporate environmental investment on Return on Assets (ROA) of listed Oil and Gas firms in Nigeria?
3. To what extent does corporate environmental investment affects Return on Equity (ROE) of listed Oil and Gas firms in Nigeria?
4. What is the relationship between internal environmental investments and financial performance of listed oil and gas firms in Nigeria?
5. What is the difference in profitability of the environmentally conscious firms and environmentally non-conscious firms in Nigeria?

1.5. RESEARCH HYPOTHESIS

H0: There is no significant influence of environmental investment on the performance of listed oil and gas companies in Nigeria

H1: There is a significant influence of environmental investment on the performance of listed oil and gas companies in Nigeria

1.6. SIGNIFICANCE OF THE STUDY

This study is largely significant because it sought to find empirical answers to questions on corporate environmental investment and financial performance of firms in Nigeria. It will also be useful to accounting standard setters such as Financial Accounting Standard Board (FASB) and International Accounting Standard Board (IASB) as it would gauge the importance of the environmental accounting and provide an insight into the strength and weaknesses environmental investments by an organization.

This insight would, of course, help these standard setters make necessary amendment to its measurement base and introducing human social responsibility variables which have not been used in prior studies, to measure environmental investments in Nigeria economy to bring about an enhancement of the quality of financial accounting information.

It will also be useful to users of the financial statement as it would provide them with adequate information on a firm’s interaction and investments within its environment. The research paper will be of interest and useful to the general public’s the government as well as the governed and also to future researchers in taking a stand on what is prevalent in the country.

This research will also serve as a resource base to other scholars and researchers interested in carrying out further research in this field subsequently, if applied will go to an extent to provide new explanation to the topic.

1.7. SCOPE OF THE STUDY

The study is restricted to effect of corporate environmental investment on financial performance of oil and gas companies listed in Nigeria 2009- 2018.

1.8 LIMITATION OF STUDY

Financial constraint– Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).

Time constraint– The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9 OPERATIONAL DEFINITION OF TERMS

Corporate Social Responsibility: it is a form of corporate self-regulation integrated into a business model. It refers to business practices involving initiatives that benefits society

Environmental Investment: Environmental investment is about the business activity of devising, commercializing and selling environmental solutions for commercial gain.

External Benefits: These are benefits derived as a result of someone else’s actions

External Costs: These are costs imposed upon a third party when goods and services are produced and consumed

Human Social Responsibility: It is a shift in focus from corporate social responsibility to a more people and community-centric effort. That is, shifting from a corporate focus to a human focus.

Social Cost: It is the total cost to society. It includes both private costs and external costs. It is the total costs to society.

Societal Costs: Are those costs impacted on the environment which results from company’s production activities. These costs do not directly affect the company’s bottom line. Societal costs are also known as external costs or externalities.

Stakeholders: A stakeholder is any group of persons or firms, who can be positively or negatively influence the activities of a corporation, management, or association. Thus, a stakeholder is anyone or anything that could affect or be affected by the operation of a business as it tries to achieve its objectives.