The Effect of Environmental Transparency on the Financial Performance of Publicly Traded Companies in Turkey

Abstract

In the developed world, the importance of sustainability for the competitiveness of companies is unquestionable. However, one of the components of sustainability, environmental transparency, is relatively hard to be prioritized, especially in a developing country like Turkey. Among a total of 509 publicly traded companies in Turkey, only around 10% ever published a sustainability report and disclosed their greenhouse gas (GHG) emissions as of 2016. Recent data shows a total of 197 published sustainability reports encompassing 72 organizations, cumulatively in the whole country, where around 3.5 million companies, of which 1.5 million are big corporations, exist (TOBB, 2017) (GRI, 2017). These facts indicate that most Turkish companies do not value environmental transparency. There is certainly a need for showing these companies the effect of environmental disclosure on their financial performance. The main research question of this paper is: What is the relationship between financial performance and environmental transparency for publicly traded companies in Turkey? Environmental performance criteria used in this research are: published sustainability reports and disclosed GHG data through CDP. Financial performance criteria used in this research are: Tobin’s Q ratio, market value to book value ratio (MV/BV), return on equity (RoE) and return on assets (RoA). In this paper, it is hypothesized that financial performance is predicted by environmental transparency performance. To test this hypothesis, regression analyses with panel data of 60 publicly traded companies, which were uninterruptedly listed in the BIST100 index for 6 years between 2012 & 2017, were used. The analyses were run for determining the effects in the same year and also two years later. Because the financial structures are very different, manufacturing and financial sector companies were analyzed separately. The results of the research analyses showed only a limited effect of environmental transparency on financial performance; in some cases even in a negative direction. In all the analyses of 2 major and 2 subsectors, the effect of SR on the financial performance of BIST100 companies was found to be not significant both for the current year of reporting and after 2 years of reporting. CDP Score, on the other hand, was found to be significantly and positively affecting only consumer discretionary subsector for the same year. On the other hand, it is found to affect MV/BV negatively in financial sector with 10% significance and Tobin’s Q ratios in Manufacturing sector and Banks subsector with 5% significance. Additionally, positive significant effect of CDP Score was seen in the RoE variable in the manufacturing sector and accordingly in its subsector; Consumer Discretionary in the 2-year time lag analyses with 5% significance level. Positive significant effect of CDP Score was also seen in the RoA variable in the banking sector in the 2-year time lag analysis with 5% significance level. Interestingly, a negative significant effect of CDP Score was also seen in the MV/BV variable in the manufacturing sector over a 2-year time lag analysis with 10% significance level.