The relationship between environmental management quality and financial performance of AIM listed firms in the UK.

Abstract

Environmental sustainability is an area of increasing concern for society, governments, corporations, and policy makers worldwide. The adoption of sustainable environmental practices contributes significantly to UK’s GDP and employment. However, theoretical and empirical arguments on environmental and financial performance relationships have been inconclusive with existing studies mainly focussing on large listed firms. The aim of this study is to examine the relationship between environmental management quality (EMQ) and Financial Performance (FP) of firms listed on Alternative Investment Market (AIM) in the UK. The study has three main objectives. First, to determine the environmental management quality and financial performance of AIM listed firms in the UK that are dominated by SMEs as most of the existing studies in the UK have only focussed on large companies listed on the main stock market. Second, to determine whether firm growth influences the environmental management and financial performance relationship of AIM listed firms which mostly consist of new and growing firms. Third, to determine if financial resources have impact on environmental management quality and financial performance relationships as much evidence suggest that environmental management practices of SMEs are low due to resources constraint. The thesis is based on a sample of 201 firms listed on Alternative Investment Market (AIM) from 2011 to 2016 with a total of 1206 firm-year observation. The environmental management quality measures were obtained through content analysis of annual and other sustainability reports, with the financial performance measures extracted from Amadeus and Fame Database. The relationship between environmental management quality and financial performance was modelled using OLS panel regression technique, supported by Arrellano Bond (GMM) dynamic panel regression model as a robustness check. The study also discussed the various theoretical (resourced-based view and stakeholder theory) and empirical studies that underpin environmental and financial performance relationships with the aim of understanding how environmental management practices influence financial performance whilst at the same time, identifying the gaps that exist in the prior empirical studies. The findings of the study suggest that strong opportunities exist for AIM listed firms to improve their internal measure of financial performance (ROA) by improving their environmental management quality. This confirmed the theoretical predictions that sustainable environmental management is a unique resource that increases product differentiation in the marketplace, enhances organisational image to customers, and as a result increases profitability. The study also revealed that the relationship between environmental management quality and Financial Performance is inverted U-shaped; suggesting that moderate level environmental management quality may generate the optimum financial benefit based on internal measures of performance (ROA). Although based on the sample from all firms listed on AIM, no significant relationship was discovered between environmental management quality and market values. It was however discovered that medium and larger firms that improve their environmental management quality also improved their market values. Regarding the impact of the firm growth on EMQ and FP relationship, no significant association of growth on EMQ and FP relationship was identified. However, it was discovered that the market punishes organic growth firms that pursue increase environmental management practices, as the moderating impact of firm growth on EMQ and FP relationship was negative. In relation to whether cash resources moderate EMQ and FP relationship, the study revealed that efficient deployment of cash resources for environmental proactive measures impact positively on financial performance. The result of this interaction also indicates that excessive investment of cash resources on environmental management practices would yield negative returns. The study confirms theoretical assertions based on the resourced-based view that resources are essential for environmental and financial performance relationships. In the case of stakeholder theory, the assertion that improved environmental performance is rewarded by stakeholders was only confirmed in medium and larger firms. Finally, the implications and suggestions for future research were discussed. Whilst it is expected that the establishment of business case will improve environmental management quality of AIM listed firms, it is also recommended that flexible innovative regulations that will encourage AIM listed firms to improve and disclose their environmental practices will be a step in the right direction.