Research paper

The Value Relevance Of

Environmental Performance:
Evidence From Pakistan

AUTHORS:

FATIMA ZOHRA

ANAM NOOR

POOJA GOLANI
Abstract

Purpose: this research papers aims to investigate the value relevance of environmental rating with
the relationship between share prices of pakistani listed companies and their environmental rating.

Design/methodology/approach: 35 companies comprise the sample and data is used for 8 years
from 2008-2015. The total observations are 192. Ohlson (1995) model is used but environmental
rating is added in the model.

Findings: the findings are that environmental rating is not value relevant for Pakistani listed
companies.

Research limitations: the limitation is the missing values in the environmental rating data.

Originality: This study addresses the gap in Pakistani market as now it give insights on how
Pakistani investors value the environmental performance of firms. Also it is helpful for companies
to make decisions about environmental initiatives.

Keywords: Environmental rating, Share price, Value relevance, Pakistan.

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Introduction
A large body of research confirms to the fact that stock markets react positively to the
announcements of environmental performance of the firm in developed countries. This encourage
companies to involve in pollution and disaster control and promote ecofriendly environment. This
research is extended from developed stock markets and applied to the developing stock market of
Pakistan.
This study aims to examine the value relevance of environmental performance of Pakistani firms
and to see that whether this helps in prediction of future returns. In order to test the relationship
between stock prices of Pakistani listed firms and their environmental performance ratings,
Ohlson(1995) model is applied
Previous studies presented mixed results. Many of the prior findings were in support of the
argument that investors value the environmental performance initiated by the firm as reflected by
value relevance of environmental performance in Russia (Middleton, 2015) and increased stock
returns (Bernal karali and Zsuzsanna Deak, 2014). However, some finding are not supporting the
argument and is consistent with the idea that investors value the environmental friendly
programmes as reflected by negative market value of firms due to environmental performance(
Hassel, Nilsson and Nyquist, 2005).
In this study, we used Bloomberg ratings which are considered most appropriate and suitable for
this type of research. The main reason for using Bloomberg ratings is the easy availability of data
as Bloomberg corporates with Robeco SAM (Sustainable Asset Management) to fetch the data.
Our sample consists of 192 observations from 35 listed companies of Pakistan. As we aims to see
the relationship between stock price and environmental performance, stock price is taken as
independent variable and dependent variables are environmental rating, earning per share and book
value per share.
The results of this study show that the accounting information that is book value per share and
earning per share are value relevant to the stock price. However the environmental performance is
not value relevant to the stock price. The results differ from most of the developed world and this
study is not supporting the argument that investors value the environmental performance.
The major implication of this study is that this will help corporations to decide the amount of
resources that they should invest in environmental initiatives.

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Literature review:

The study by Marco Fazzini Lorenzo Dal Maso, (2016) investigated the value relevance of non-
financial information, also he examined that independent assessment of environmental policies
affect the value relevance of environmental disclosure. He found that environmental disclosure is
value relevant and positively correlated with market value of company, but assured disclosure does
not provide additional relevance.
Eli Amir, Baruch Lev was interested to know the value relevance of non-financial information in
cellular industry and conclude that just financial information is not enough to determine firm’s
value but along with non-financial information, it is value relevant in cellular industry. Because
financial information does not let investors know about commissions and churn rate in cellular
companies.
Guy Dresser, (1997) concluded that market will reflect the importance of non-financial indicators,
because companies which demonstrate better research and development, better management and
better customer/supplier relationships deliver superior results in the long-term. He also considered
environmental behavior and community involvement in non-financial indicators.
Youchao Tan, Yuyu Liu, (2017) tested that FNFI (future non-financial information) can reduce
information asymmetry between firms and external suppliers of capital. The results showed that
excellent and good firms tend to publish information with high quality to gain the trust of investors
and get investment, which reduces the corporate financing constrains to a larger extent than firms
rated low.
Shihping Kevin Huang Chih-Lung Yang, (2014) inspected the link between corporate social
performance and corporate financial performance. The conclusion was that these two are positively
linked and it is positive even after R&D and industry type are controlled. It means a corporation
which attain more social responsibility enjoys good financial condition. It also investigated hat
non-manufacturing firms have strong CSP-CFP relation than manufacturing firms.
Michel T.J. Rakotomavo, (2012) investigated the investment in social responsibility versus
dividends and concluded that the companies which are in maturity stage are more indulge in CSR
and are larger, profitable and more earned equity and pay more dividends. The investment in CSR
is not cut from dividends. It means the investment in CSR ultimately increase the stock price.

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The study (Frank H.M. Verbeeten Ramin Gamerschlag Klaus Möller, (2016)) suggests that
separate CSR report in positively related with share prices but provision for CSR is not related
with share price. Even the provision for environment disclosure is not related or negatively related.
Also, it suggests that there is a positive relation between social CSR disclosure and price of share.
It is so because CSR disclosures are risk management strategy and provide positive economic
returns. And companies provide these disclosures to have good financial performance in future.
Bernal karali and Zsuzsanna Deak 2014 investigated the effect of company environmental news
on shareholder value which appeared in media. The companies selected were in the food industry
only. They concluded that environmental improvements increased the stock returns while
environmental violations hurt the stock returns. Furthermore, they found that stockholders and
other participants valued those environmental actions more which were started by the firms
themselves.
Hamilton 1995 studied the effect of TRI (Toxic Release Inventory) data which is released by
Environmental Protection Agency (EPA) in June 1989, on market value of firms. He found that
stockholders faced negative significant abnormal returns on the news of the pollution figures. The
firms experienced loss of $4.1 million in stock value when the news of TRI was out.
Guenther Cappella Blanchard abs Marie Audi Laguna examined the effect of industrial disasters
on stock market reactions. A quarter of the accidents were related to toxic release and 50 percent
of them caused at least one death. They concluded that after every accident, stock market reacted
negatively. It was found that stockholders suffered loss of 1.3 percent over two days after the
occurrence of disaster. It was also observed that those firms which had bad records of safety and
environment suffered more stock market losses.
Hendricks and Singhal investigated the effects of winning of quality awards on firm’s market value
by estimating change in stock prices in the sample of firm whose data were available publicly. The
results showed that stock market positively reacts to quality winning awards.
Dale Miller Bill Merrilees, (2013) researched that there exists association between customers’
perceptions of retailer sustainability practices and the customers’ brand attitudes towards the
retailer corporate brand. So, the corporations are striving to have substantial sustainability of their
environmental management.
White, Mark A, 1996 tested the relationship between good reputation for environmental
responsibility and risk-adjusted shareholder returns and concluded the positive relationship. It

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means a shareholder gets great investment returns in the periods when the corporation is rated
“green”.
Caroline Flammer (2012) studied the sensitivity to corporation’s environmental work of investors.
After conducting the event study of the environmental news of all the U.S. publicly traded
corporations from the time of 1980 to 2009 found that shareholders are sensitive to ecofriendly
and Eco harmful initiatives of companies. The study found that shareholders positively reacted to
environmental friendly initiatives and responded negatively to Eco harmful behaviors of
companies. Second, they found that Environmental corporate social responsibility is a resource
with decreasing marginal returns for firm.
Shreekanth Gupta and Bishwanath Golda examined the effects of environmental performance on
stock prices of the firms. The firms included in the sample were large pulp and paper, automobile
and Chloe alkali firms in India. The findings showed that the firms with weak environmental
performance as per the environmental rating programs lowered the returns of investors who hold
stocks of those companies.
Robison, muoghalu and Glascock (1990) investigated the effects of harmful and dangerous waste
malpractice and mismanagement lawsuits on capital markets. They found that firms in the sample
suffered major losses in their market values.
Nicolau and Sellers (2002) examined the effect of quality certification on market value of the
company. Companies selected were trading on Spanish stock market. They analyzed that on
announcements of quality awards, the share prices saw the abnormal returns. The market positively
reacted to these quality awards.
Amy j. Hillman* and Gerald d. Keim, (2001) concluded that Building better relations with primary
stakeholders like employees, customers, suppliers, and communities could lead to increased
shareholder wealth and can be a source of competitive advantage in this world of globalization.
The results showed that investing in stakeholder management may be complementary to
shareholder value creation and may indeed provide a basis for competitive advantage.
Susmita Dasgupta, Jong Ho Hong, Benoit Laplante, Nlandu Mamingi, 2005 examined the
investor’s reaction on publication of list which shows the firms which did not comply national
environmental laws and regulations. It came up with the strong reactions. It also mentioned that
the intensity of reaction depends upon the intensity of coverage by media about these firms. But

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this did not examine that whether these reactions effective enough to change the environmental
performance of firms.
Gilley, Worrell and Abuzar El-Jelly examined the effect of greening initiatives on the stock returns.
They included both manufacturing and service firms in the sample. The results showed that there
is not any overall effect of corporate environmental initiatives’ announcements on the firm’s
anticipated performance. But these initiatives influenced the perceptions of investors of the future
performance. Investors responded positively towards the introduction of environment friendly
products which increased the firm’s reputation and it enabled organizations to involve in
environmental sustainable strategies.
Joaquín Cañón-de-Francia · Concepción Garcés-Ayerbe, (2009) Investigated that how ISO 14001
certification affects the market value of firms and the results showed that ISO 14001 certification
has a negative effect on the market value of certain firms. The results also showed that the market
negatively views the allocation of resources to ISO 14001 certification in the case of less polluting
and less internationalized firm. The results also suggested that the firm following these ISO
standards voluntarily don’t have an edge over its competitors.
According to a study by Maria Federica Izzo Barbara Sveva Magnanelli, (2017) investigated the
relation between the cost of debt and the CSR performance, which resulted that CSP does not play
a pivotal role in determination of cost of debt. That was because banks don’t consider CSP while
granting loans as an important factor in reducing the operational risk that firms face.
The research on value relevance of environmental performance in India, brazil, Indonesia, Italy,
US and European countries was done in different industries with different non-financial
environmental variables. Most of the studies conclude with the findings that non-financial
environmental variables are value relevant and related with share price. Some of the studies
conclude with non-relevance and some with mixed findings.
Environmental performance in Pakistan can be value relevant when provide added information to
financial variables and assist investors in decision making in stock market of Pakistan. The
hypothesis formulated to conduct this research is:

H1: Environmental performance ratings are value relevant to the market.

Research Design and Method

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Sample and data selection:

This research aims to test the relationship between shares prices of Pakistani listed companies and
the environmental performance ratings. It is expected that the share prices that are determined by
the investors or general public are affected by environmental ratings of a companies and other
factors. All the data of financial factors which includes historic share prices, EPS and BV per share
are collected from Bloomberg software. Other than this, nonfinancial factor affecting share prices
that is environmental rating of the companies is also taken from Bloomberg terminal (which
basically fetches the environmental data from RobecoSAM (Sustainable Asset Management)).

The initial sample consist of 37 companies Pakistani publically listed companies whose
environmental rating by Bloomberg were available from the period of 2008 to 2015. This makes
197 observations of all 37 companies over the 8 years period. The sampling method for this study
is the availability of data, excluded the companies whose environmental data is not available on
Bloomberg of 3 or less years has been excluded. After the exclusion a sample of 35 companies,
making firm yearly observation equal to 192.Our final sample in which data of all financial and
non-financial variables is available is making a sample of 192 observations from 35 unique
companies.

Research model:

Accounting information no doubt plays a very significant role in analyzing the impact on share
prices of a company this idea has been proven by Ohlson (1995) which is basically a valuation
framework that investigated the relation between accounting book value, equity value and future
earnings. Further in order to check the impact of other non-financial information that is
environmental ratings on share prices of a company, an additional independent variable as rating
has been added.

SPxy =β0+β1BVxy+β2EPSxy+β3RATINGxy+µxy

Where:

SPxy = Company x share prices at year y

BVxy = Company x Book value at year y

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EPSxy = Company x Earning per share at year y

RATINGxy = Company x environmental rating RobecoSAM at year y

Here share prices of x company at y period is taken as a dependent variable whereas book value
per share, earning per share and environmental ratings of x company at y period are considered as
independent variables. Here the share price that is taken is the year end last price of the company
stock in a particular year. Whereas book value per share can be defined as total common
stockholder’s equity divided by number of common shares outstanding here the taken book value
of each company at year end. EPS is defined as earnings per share which has been taken as the last
EPS of the year. Both of these financial variables contain useful information that is helpful in
determining the share prices of a company.

Other than this, environmental rating has been taken from Bloomberg terminal using ESG<GO>
that is (Economic Social and Governance). Basically, Bloomberg fetches the ESG from
RobecoSAM that is an independent investment specialist focused exclusively on Sustainability
Investing. It offers many services including sustainability assessments and benchmarking services.
RobecoSAM and Bloomberg band together to make the results of the Corporate Sustainability
Assessment (CSA) readily available to the global investment community. RobecoSAM makes the
percentile ratings of the scores of the CSA available to all licensed Bloomberg users. The
information shared by RobecoSAM on Bloomberg are:
1. Relative rating of companies within their industry (percentile ranks)
2. Percentile ranks at total dimension as they appear on Company Benchmarking Scorecards.
3. Additional research by RobecoSAM

The company additionally in order to maintain privacy and their own integrity will not share
Company answers, data points, comments, documents or any other confidential information
collected through the CSA.
Together RobecoSAM and Bloomberg has taken this initiative due to following reasons that are
advantageous to investors especially those who are licensed Bloomberg users:
1. To be more transparent about the results of the CSA and helping to improve the credibility
and utility of the CSA to creditors and companies.

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 2. Companies are positive toward the disclosure of the results of the CSA to be more visible
to investors. A survey conducted by RobecoSAM in the fall of 2015 showed that the vast
majority of companies favored increased disclosure around CSA results
3. Investors increasingly would like to know more about the CSA.

Corporate Sustainability Assessment that is CSA is an annual assessment of companies’

sustainability practices. Around the world over 3400 listed companies are assessed by asking 80-
120 industry-specific questions that focus on economic, environmental and social indicators that
are relevant to the company’s profile and investment decisions, but that are under-researched. The
highest score for each question is 100. Based on the value and relevance of questions the weight
is assigned to over all questions and final rating is obtained of each indicator.

In order to assess the dimension of environment there are various factors that are judged which
include:

 environmental and social reporting

 operational eco-efficiency
 direct greenhouse gas emission,
 indirect greenhouse gas emission
 energy consumption
 waste
 water consumption

Results and Discussion

Descriptive Statistics

The total observations are different for share price, book value per share, earning per share and
environmental rating. The Descriptive Statistics of these observations are given in table 1. The
average share price of all companies in the sample is Rs.314.5301 with minimum of Rs.1.4559
and maximum of Rs.11203.8. it shows the wide range of sample. The average earning per share is
Rs.20.6515 and book value per share has average of Rs.126.2526. It can also be noted that some
companies have negative earnings and negative book values per share which may affect the
analysis. The environmental rating is around 10.58572 in which the average sample has very low
rating. The companies in sample have environmental rating as low as 1.5504 and as high as
45.7364.

Table 1 Descriptive Statistics

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 Variable Obs Mean Std. Dev Min Max
SP 274 314.5301 1053.873 1.4559 11203.8
E 266 20.65195 46.42205 -188.22 354.59
BV 264 126.2526 184.7081 -0.4192 1263.885
RATING 187 10.58572 11.3831 1.5504 45.7364
Notes: SP: share price; E: earnings per share; BV: book value per share; RATING: environmental ratings.

Regression Results

The very initial regression was conducted on the original Ohlson model. The results in table 2
depict that the assumption that accounting information is value relevant is true (Model 1). In model
2, the hypothesis that environmental performance is value relevant is tested. In these results, the
accounting information is still value relevant but environmental rating is not value relevant (p-
value=0.4148).

Table 2 Regression Results on Original Ohlson (1995) Model and Panel Data

1 2
Original Ohlson Model Panel-Samples
VARIABLES Coefficients P>t Coefficients P>t

E 13.29999*** 0.0000 12.00239*** 0.0000

BV 1.851235*** 0.0000 2.493111*** 0.0000
RATING 3.97951 0.4148
Constant -185.8383 0.0000 -261.656 0.0012
N 264 179
R-squared 0.699165 0.717632
Adj. R-
squared 0.69686 0.712792
F 303.2925 148.2532
Prob>F 0.0000 0.0000
Legend: *p<0.05; **p<0.01; ***p<0.001

Based on the statistical tests we conclude that environmental performance does not seem to have
value relevance for the market value of Pakistani listed companies.

Conclusion
This research paper explores that environment disclosure of Pakistani listed companies is value
relevant or not. Previous studies were taken place with different financial and non-financial
variables and came up with mixed findings. For this paper’s purpose, the data of financial
variables; BV per share, Share price, Earnings per share and environmental rating is taken from

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Bloomberg. For non-financial variable environmental rating, it fetches data from RobecoSAM
(Sustainable Asset Management).

This study uses data from a final sample of 35 Pakistani listed companies for 8 years from 2008 to
2015. Ohlson (1995) model was used and share price is regressed with earnings per share, book
value per share, and environmental ratings. The results are not significant for environmental rating
showing that environmental rating is not value relevant in Pakistan stock exchange.

There are some limitations of this research. First, the data was limited for Pakistani listed
companies. The data of environmental rating was not available for many years of many companies,
so our data was unbalanced panel, and this may influence our findings. Second limitation was of
being an undergraduate student as we did not have access to all sources during our research like
paid soft wares and paid research studies for reference. Third, we, as students did not have
experience of research work. These limitations were not controlled during study and may impact
the work.

The research on this subject mostly needs secondary data so the field is open to further work upon.
The practical implications are that Pakistan should also an independent institute like PROPER
program in Indonesia by Indonesian Ministry of Environment which rate companies on the basis
of their environmental performance and categorize as good performers and bad performers. Our
findings show that Pakistani stock market does not value the environmental performance. It can
be implied that there is no such rules and regulations in Pakistan which enforce companies to
comply as these are in other countries like European countries and US.i

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