The Impact of Sustainability Accounting on Environmental Performance and Productivity: A Panel Data Analysis

1.1 Background

In 2015, the United Nations adopted the Sustainable Development Goals (SDGs), a set of 17 goals (poverty, hunger, health, education, gender, water, energy, employment, infrastructure, inequality, cities, sustainable Consumption and production, climate change, marine resources, terrestrial ecosystems, peace and justice, and partnerships to achieve them) and 169 targets associated with them [1]. While corporations are seen as key players in achieving the SDGs, they also represent a great opportunity for companies to promote corporate social responsibility (CSR) more than ever before [2]. At the same time, the world's largest institutional investor, BlackRock, has incorporated SDG initiatives into its investment decisions, and companies are increasingly interested in the SDGs from a normal business perspective as well. This trend can be easily imagined from the fact that SDG logos and icons can be found in many sustainability reports and integrated reports.

1.2 Problem statement

However, if companies, as for-profit organizations, engage in the SDGs, it is crucial for them to bring about economic benefits. From an economic perspective, companies are motivated to engage in the SDGs because they can anticipate economic advantages. In fact, the SDG Compass guidelines emphasize the alignment of the SDGs with management strategies, indicating that companies consider economic considerations when working towards the SDGs. Sustainable development cannot be achieved at the expense of the environment, society, or the economy. Therefore, efforts to balance environmental and social concerns with economic considerations are necessary.

In this context, the role of accounting in contributing to the SDGs is being explored [3]. Sustainability accounting is expected to play a significant role in supporting sustainable management. This paper aims to examine how sustainability accounting can be utilized to promote sustainable development goals. Sustainability accounting encompasses a range of accounting methods, including environmental accounting, and involves reporting on a company's economic activities related to society and the environment. Although various definitions exist, such as "the measurement, management, and reporting of corporate activities to sustain or develop an entity's ability to create value over time" by the U.S. Sustainability Accounting Standards Board [4], sustainability accounting is often used interchangeably with environmental accounting and sustainability reporting in practice. This may be because sustainability accounting is seen as a developmental form of environmental accounting and reporting [5].

Therefore, the focus here is on environmental accounting, which is a significant component of sustainability accounting. Environmental accounting is defined as "the act of recognizing, measuring, evaluating, and communicating environmental events" [6]. However, there are variations in environmental accounting based on the subject, object, purpose, and other factors. For instance, the Environmental Accounting Guidelines 2020, issued by the Ministry of Environment [7], defines environmental accounting as a method for companies to promote environmental conservation efforts efficiently and effectively while maintaining a good relationship with society, in order to achieve sustainable development. The guidelines describe environmental accounting as a system to recognize the costs of environmental conservation in business activities, the effects obtained from such activities (both environmental and economic effects), and to measure and communicate them quantitatively (in monetary or physical units) as much as possible. While not all environmental accounting practices conform strictly to these guidelines, this paper will discuss environmental accounting in a broader sense.

The primary objective of environmental accounting is to link environmental conservation activities with economic activities. If environmental accounting functions effectively, it should be possible to strike a balance between the environment and the economy. While case studies have shed light on these effects to some extent, generalizations cannot be made based solely on these individual cases. However, if these effects can be generalized, they can serve as incentives for companies to adopt sustainability accounting, including environmental accounting, and thus contribute to the promotion of the SDGs. This is evident from the fact that many of the SDG goals and targets are related to environmental issues, which are a major focus of the SDGs [8]. Notably, direct contributions are expected in achieving Goal 7 "Affordable and Clean Energy," Goal 12 "Responsible Consumption and Production," and Goal 13 "Climate Action."

1.3 Research objectives

Based on the above, this paper statistically investigates the relationships between the adoption of environmental accounting, environmental performance, and productivity using data from companies listed on the National Stock Exchange from 2011 to 2020 to show how the economy and the environment are balanced in corporate management. However, since these relationships are considered to differ greatly depending on firm-specific characteristics and the circumstances in which they are placed, the effects of the introduction of environmental accounting on environmental performance and productivity may be overestimated if these differences are not taken into account. Therefore, in our analysis, we use not only the Ordinary Least Squares (OLS) method, which is used in many accounting studies but also the Fixed Effects (FE) model and the Random Effects (RE) model to estimate how much of the perceived effects of the introduction of environmental accounting are firm-specific effects.

This paper is organized as follows. Section 1 derives the hypotheses, section 2 describes the analytical methods, data, and variables used in the analysis, section 3 describes the results of the analysis, and section 4 summarizes the discussion.

Table 1. Percentage of industries adopting environmental accounting

Total factor productivity, which is productivity that takes all factors of production into account, is used as the variable that captures productivity. In this paper, a Cobb-Douglas type production function consisting of labor (the number of employees), capital (amount of tangible fixed assets), and raw materials (manufacturing cost) are estimated and its value expressed as a residual is obtained. The specific procedure is as follows.

The Cobb-Douglas type production function consisting of labor, capital, and raw materials is expressed as in Eq. (5).

$X=A L^\alpha K^\beta M^{1-\alpha-\beta}$    (5)

where, X is output, A is total factor productivity (i.e., $A=\frac{X}{L^\alpha K^\beta M^{1-\alpha-\beta}}$$\quad$), L is labor, K is capital, and M is raw materials. In addition, α, β, and 1-α-β are the distribution rates of labor, capital, and raw materials, respectively, with 0<α<1, 0<β<1, and 0<α+β<1.

Taking the logarithm of both sides of Eq. (5) to make it linear, it is expressed as in Eq. (6).

$\begin{aligned} \ln X & =\ln A+\alpha \ln L+\beta \ln K+(1-\alpha-\beta) \ln M \\ & =\ln A^*+\alpha \ln L+\beta \ln K+(1-\alpha-\beta) \ln M+\mu\end{aligned}$    (6)

lnA* is the constant portion that captures the average value of total factor productivity, and μ is the residual. Since this residual can be viewed as a relative deviation from lnA*, it can be assumed that the residual includes factors such as technological innovation and business efficiency that cannot be explained by labor, capital, and raw materials alone in total factor productivity, as can be seen from Eq. (7).

$\mu=\ln X-\ln A^*-\alpha \ln L-\beta \ln K-(1-\alpha-\beta) \ln M$    (7)

Therefore, Eq. (6) was estimated using the operating variable method with the number of employees, amount of tangible fixed assets, and manufacturing cost one period earlier as operating variables to obtain the value of μ among total factor productivity. Note that since μ is a logarithmic value, the original value was used as the variable.

3.4.2 Variables capturing the introduction of environmental accounting

As a variable to capture the introduction of environmental accounting, we use an environmental accounting introduction dummy, which is a dummy variable that takes 1 if environmental accounting has been introduced and 0 if it has not. Due to the characteristics of the data used (National CSR Database (Environment), described below), this variable is not limited to specific types of environmental accounting, such as environmental accounting based on the Ministry of  Environment guidelines, but rather captures the introduction of environmental accounting in a more general and broad sense, including such accounting 6.

It may be more desirable to focus on the details of the introduction of environmental accounting rather than the introduction itself, but as mentioned earlier, the main purpose and scope of application are not standardized among companies, and data based on different standards (units) cannot be treated in the same way. Furthermore, even if they could be treated identically, it would be difficult to use them in the analysis because the number of samples from which data related to the contents of "environmental accounting, understanding of the amount of costs and effects" and "total environmental conservation costs" could be obtained would be limited.

3.4.3 Variables capturing environmental performance

As a variable for capturing environmental performance, we use the environmental performance score, which is a score related to environmental conservation efforts and performance, included in the National CSR Database (Environmental Section). Based on the results of the National CSR Database, companies' environmental conservation efforts and performance are comprehensively evaluated on a scale of 0 to 100, and the database contains scores for the top 500 to 800 companies each year (500 companies until 2013, 700 companies from 2014 to 2019, and 800 companies from 2020 onward) 7. Note that since these scores are evaluated after taking into account the introduction of environmental accounting and environmental management, it is not desirable to use data obtained from the same year's database for these in the analysis. For this reason, data from one year earlier are used for the environmental accounting introduction and environmental management introduction variables (and other control variables).

3.4.4 Control variables

The control variables are as follows. First, we use an environmental management introduction dummy, a dummy variable that takes 1 if the firm has introduced environmental management such as ISO 14001 and 0 if it has not, to control for the effect of various environmental conservation efforts. Second, to control for the effect of firm size, we use the log value of total assets. Third, we use the debt ratio, which is total debt divided by equity, to control for the effect of corporate financial safety. Fourth, to control for the impact of R&D, we use the ratio of R&D expenditures to sales, which is R&D expenditures divided by sales. Fifth, to control for the impact of the firm's position in the supply chain, we use the ratio of advertising expenditures divided by sales. We assume that the ratio of advertising expenditures to sales is higher for firms with higher consumer relevance. Sixth, we use firm age to control for firm maturity. Seventh, to control for the effect of each industry, we control for the 25 industries to which the sample firms belong (fisheries, agriculture, forestry, mining, construction, food products, textile products, pulp and paper, chemicals, pharmaceuticals, rubber products, glass and stone products, steel, nonferrous metals, metal products, machinery, electric equipment, transportation equipment, confidential machinery, and electrical equipment) out of 29 industries excluding finance-related industries classified by the National Stock Exchange. We use industry dummies, which are dummy variables that take the value of 1 for each of the firms belonging to the following industries: oil and coal products, air cargo, oil and coal products, food products, textile products, pulp and paper, chemicals, pharmaceuticals, rubber products, glass and soil products, iron and steel, nonferrous metals, metal products, machinery, electrical equipment, transportation equipment, confidential machinery, other products, electricity and gas, land transportation, shipping, information and communication, wholesale, retail, and services. Note that these industry dummies are not included because firms belonging to the petroleum and coal products, air transportation, warehousing, transportation-related industries, and real estate industries are not in the sample. Eighth, we use annual dummies, which are dummy variables that take 1 for each of the years 2011-2020 to control for various macro shocks in each year.

3.5 Databases

Data on environmental accounting, environmental performance, and environmental management were obtained from the National CSR Database (environment section), while data used to derive total factor productivity and control variables were obtained from Fundoodata.

The purpose of this paper was to explore the potential of sustainability accounting as a means to promote the SDGs. If the introduction of sustainability accounting can bring about a balance between the environment and the economy in corporate activities, it can be an incentive for many companies to introduce sustainability accounting, and as a result, the SDGs should be promoted. Therefore, in this paper, we quantitatively analyzed the relationship between the introduction of environmental accounting, environmental performance, and productivity, which is one of the sustainability accounting methods, using the data of companies listed on the National Stock Exchange from 2011 to 2020, and demonstrated the compatibility between the environment and the economy. In doing so, by estimating not only OLS but also FE and RE, we also verified how many of the effects perceived as the effects of introducing environmental accounting are actually company-specific. The main analysis results are as follows.

First, it is clear that the introduction of environmental accounting enhances environmental performance. Therefore, quantitative information on environmental costs and effects on environmental conservation obtained from environmental accounting works well to enhance environmental performance. Since environmental accounting is only visualized as quantitative information, it can be said that efforts based on the information enhance environmental performance rather than that the introduction of environmental accounting itself enhances environmental performance. In other words, it can be understood that visualization leads to improvements in areas that were previously overlooked, and as a result, environmental performance can be enhanced. The finding that the primary effect of improving environmental performance can be achieved is important because companies do not need to introduce environmental accounting if their only objective is to reduce costs.

On the other hand, as mentioned earlier, the environmental performance score obtained from the National CSR Database (environmental section), which is a variable that captures environmental performance, is evaluated after taking into account the introduction of environmental accounting in the first place. Therefore, even if data from one year ago were used as the variable for the introduction of environmental accounting, we cannot completely deny the suspicion that the introduction of environmental accounting enhances environmental performance because it is largely derived from the characteristics of the data. However, since the National CSR Database (environment section) clearly indicates the distribution of scores related to the introduction of environmental accounting, we additionally conducted an analysis adjusting the distribution of scores, but the results remained almost the same. Therefore, although the data is second best from the viewpoint of availability, it is considered that the introduction of environmental accounting enhances environmental performance to some extent. However, the robustness of the results is an issue for the future.

At the same time, it became clear that there are (various) efforts to enhance environmental performance other than the introduction of environmental accounting (and related efforts). This result is probably plausible from a practical point of view, since not all firms have introduced environmental accounting, and it cannot be said that firms that have not introduced environmental accounting cannot improve their environmental performance. In addition, the environmental management system, which is a proxy variable for various environmental conservation efforts, is a framework for promoting environmental conservation efforts through the PDCA cycle in the first place, suggesting the possibility that continuous efforts are necessary.

However, the effects of the introduction of environmental accounting and other environmental conservation efforts may not actually be very large. This is because if the invisible, company-specific effects that affect both the introduction of environmental accounting and other environmental conservation efforts and environmental performance are adjusted for, the respective effects are reduced to about one-third. Conversely, if they were not adjusted for, they would be taken as effects of environmental accounting and other environmental conservation efforts. This indicates that companies that improve their environmental performance have such capabilities and attributes by nature, and that their portion may be very large. However, even after adjusting for this, it is still a significant finding that the introduction of environmental accounting and other environmental conservation efforts enhances environmental performance. It can be said that firm-specific capabilities and attributes are not sufficient to enhance environmental performance and that the introduction of environmental accounting and other environmental conservation efforts play a complementary role.

Second, it is clear that the introduction of environmental accounting increases productivity indirectly through improved environmental performance. Although it is not necessary to introduce environmental accounting if the only purpose is to increase productivity (or reduce costs), it is still noteworthy that it results in increased productivity. Therefore, quantitative information on environmental costs and their effects on environmental conservation obtained from environmental accounting works well to increase productivity. In other words, the quantitative information from environmental accounting suggests that cleaner production-type production systems work well. For example, in the case of MFCA, the relationship between environmental performance (associated with waste reduction) and productivity may be intuitively understandable because costs are equally allocated to waste (negative products) as well as products (positive products) in proportion to their quantity. These economic benefits provide an incentive for firms to adopt environmental accounting and other environmental conservation efforts over the long term. However, environmental accounting can be interpreted as a way to increase productivity only by increasing environmental performance, rather than by increasing environmental performance and productivity independently of each other. This is consistent with the fact that environmental accounting is a method that focuses on increasing environmental performance.

However, without adjusting for firm-specific effects, it would be perceived as directly increasing productivity instead. This is a sham correlation, and most of the direct effects of the introduction of environmental accounting are due to firm-specific effects that are not visible. If we interpret the results only in terms of this (apparent) effect, we may mislead the effects of the introduction of environmental accounting. For example, a company that prioritizes cost reduction may introduce environmental accounting expecting a direct effect on productivity from the results but may decide not to do so because such an effect is not seen in reality. This is because obtaining the more accurate data needed for environmental accounting is both time-consuming and costly, as it requires complex processes to be covered and accurate cost calculations to be made. However, the main purpose of environmental accounting is to improve environmental performance, and from this point of view, such an approach is a complete waste of time and money. However, the fact that the effects of environmental accounting exist at least as indirect effects through environmental performance, even when company-specific effects are adjusted, may provide an opportunity for companies that place importance on economic effects to introduce environmental accounting with a focus on enhancing environmental performance. This is because it can be interpreted as the discovery of previously overlooked waste in terms of the "environment," which has not been taken into consideration, and the realization of production innovation in the form of increased productivity.

These results suggest that the realization of production innovation while enhancing environmental performance through the introduction of sustainability accounting is exactly the innovation expected by the SDG Compass. The results support that the introduction of sustainability accounting will provide incentives to the companies to adopt sustainability accounting because it will bring about a balance between the environment and the economy, and will be an opportunity for the SDGs to be promoted. As companies are expected to contribute to the SDGs, they should be able to do so in a way that also benefits their core business. In this paper, we have clarified these possibilities through empirical analysis using data and proved that they can be generalized. Therefore, it can be said that this paper has brought new knowledge about the approaches of companies in the SDGs era and the way sustainability accounting should be done.

5.1 Limitations

However, this paper also has the following limitations. First, although sustainability accounting is a collection of various accounting methods, this paper focuses on environmental accounting as a major component and does not cover environmental reporting (sustainability reporting), which is another aspect of sustainability accounting, even though it is important from the perspective of balancing the environment and the economy. However, since the focus of this paper was on increasing productivity among the economic aspects, it would not be a major problem even if environmental reporting is not included in the scope of this paper. On the other hand, since the functions of environmental accounting include not only internal and external functions, but also methods and boundaries for calculating environmental costs, effects on environmental conservation, and economic effects from measures taken to achieve them are not standardized, the introduction of environmental accounting is treated uniformly and simplified in this paper, which may not adequately capture the functions for environmental performance and productivity. For further elaboration, it would be necessary to focus on MFCA and other functions specific to internal functions, or to consider boundaries including the supply chain, but even so, in light of the results of this paper, it is considered that these functions are picked up to some extent. It is expected that these limitations will be clarified in future studies.

5.2 Future research

Finally, we would like to discuss some policy recommendations on sustainability accounting. Under such circumstances, corporate action guidelines such as the SDG Compass are indispensable for companies to address the SDGs, but the role of sustainability accounting has not been considered so far. On the other hand, the results of this paper suggest that sustainability accounting has the potential to fully contribute to the SDGs. In light of the above, the inclusion of sustainability accounting in the corporate action guidelines will not only help promote the SDGs but also provide a good opportunity for sustainability accounting (environmental accounting), the role of which has been decreasing in the number of companies that have adopted it, to be reconsidered. In addition, if environmental accounting guidelines and environmental management accounting method workbooks are restructured in relation to the corporate action guidelines of the SDGs, it is expected to have a greater effect in India. We hope that this paper will serve as a starting point.