COMPANY SUSTAINABILITY STRATEGY TOWARD GOVERNMENT REPORTING INITIATIVE:

MANAGING COMPANY RESOURCES

INTRODUCTION

Environmental issue has become an important topic of discussion in business. More and more
businesses have started to publish environmental report, following the trend of environmental
disclosure program. Environmental report is an annual report about the company’s environmental
performance and it might related to company waste , pollutant, emission or energy reduction. The
availability of such report makes it easier for stakeholders to monitor the environmental performance
of companies (Clarkson, Overell & Chapple, 2011). Environmental disclosure program may be done
voluntarily or as a response to new regulation.

There are several categories of environmental report, based on the intention of publishing or initiative.
According to the intention, there are voluntary and mandatory reports; while according to the
reporting initiative there are government, non-government organization, and industrial association
initiative (Lyon & Maxwell, 1999). Based on government initiative, there are two different types: type
of report that only publishes data and the other one a report that publishes data and analysis (e.g.
ranking of participating companies).

Companies who published their environmental report believed that by doing so, they will gain benefit
from it. Previous studies in business and management have found that there is a relationship between
reporting and company performance. For instance, Michelon (2011) found that there is an association
between environmental report and company reputation, while Cho & Patten (2007) point out that
environmental disclosure can be used as company legitimacy tools. Khlif, Guidara & Souissi (2015)
found that building an effective communication channel through environmental report can increase
stakeholders trust and loyalty.

Environmental issue is also become a major concern of policymakers. When the government play their
role, it will have a direct impact to businesses operation within their sphere of authority. Studies on
policymakers related to the environmental concerns show that there is a tendency to regulate
pollutant, especially greenhouse gasses and industrial waste. Several studies show that when
government initiates environmental report, it can make significant impact in pollutant reduction, as
in the case of Indonesia (García, Afsah & Sterner, 2009) and China (Dasgupta, Laplante, Mamingi &
Wang 2001 ). In the case of Indonesia, data shows that the amount of pollutant was decreased
significantly after environmental report was published (García et.al., 2009), while in the case of China
the amount of pollutant was only slightly decreased (Dasgupta et.al., 2001). In addition, Konar and
Cohen (1997) found that after the implementation of Toxic Release Inventory (TRI) disclosure program
in the US, air and water pollutions have decreased significantly.

The government’s environmental report is intriguing to be studied further. First of all, although the
government determine the company’s participation to the program is usually voluntary, however the
number of company that willing to participate are increasing over time. It is interesting to study the
motivation of companies to participate in the program and to obtain deeper understanding how
company managing their resources in order to comply with government environmental standard.

There is still limited knowledge to explain how government reporting program can motivate
companies to reduce their emission or waste. A study by Annandale, Morrison-Saunders, and Bouma
(2004) found a relationship between government voluntary protection program and company
environmental performance, but it does not focus on environmental report. Furthermore, it also does
not explain how government voluntary instrument able to make a company to obtain better
environmental performance either.
The question related to how the company organize and managing their resources in order to achieve
better environmental performance is also unanswered, especially for Indonesian case. Therefore, the
following questions need to be examined further:
How does the government environmental report program influence company’s environmental
performance? How do the company managing their resources in order to reduce pollutant and to
comply with government requirement?

It is argued that those two questions are worth to be analyzed from the perspective of institutional
theory and resource-based view theory. The two theories are commonly used in explaining
environmental related topics, but each explains different perspective in difference cases (Berrone,
Gelabert, Fosfuri & Gomez-Mejia, 2007). The institutional theory explains how organizations response
to to the external pressures, while the resource-based view looks at the internal capability of
organizations to create competitive advantage (Berrone et.al, 2007). The two theories can
complement and strengthening each other’s analysis.

However the aims of this study is to contribute in understanding the effect of government
sustainability reporting initiative toward company’s environmental performance. Therefore in order
to develop better understanding about this issue, firstly this research will find out about the
company’s motivation that lead to the engagement with the government voluntary environmental
program. Secondly this research will investigate how the company managing their resources to
improve their environmental performance.

SUSTAINABILITY STRATEGY

It cannot be avoided that every production process which transform raw materials or services become
valuable products must use resources which obtained from natural environment and at the end have
to leave something in the form of waste. However, it is very important to look at to this issue when
production waste may affecting the environmental and social condition. The consideration may be
taken to minimize the negative impact of company activities toward social condition and natural
resources.

In business and economic area, this concern has been growing since the UN conference about
environment and development in 1992. The outcome of this meeting was the agreement to make sure
that economic development has to consider social and environmental condition for future generation.
This concept known as “triple bottom line” or the ability of a company to manage their financial, social
and environmental simultaneously. (Elkington, 1998)

Therefore a sustainable company is a company which able to generate profit and also able to minimize
the negative impact of company activities toward social and natural environment. An effort to
become a sustainable company is believed as part of the success factor which can turn a company into
competitive organization ( Toppinen & Hänninen, 2013). For instance by introducing a new product
which has minimum consequences to the detrimental of natural and social environment, a company
may create a new market with less competitor. Their new product has differentiated themself from
their competitors and also might improve customer loyalty (Toppinen & Hänninen, 2013).

Besides developing a new product, energy use reduction can also be considered as company
sustainability initiative. If a company can recognize the harmful substance that they produce as
residuals of their main activity and know how to minimize it, they may enjoy additional economic
benefit. For instance by reducing the usage of electricity that can produce greenhouse gasses,
company also can reduce their cost. However there are many companies do not realize that they daily
activities have created and release harmful gases to environment.

Waste minimization is an activity that intend to reduce the amount of waste. This activity can help
company to improve efficiency and reduce it cost. This also means there is a direct relationship
between waste reduction and cost minimization. Therefore either waste minimization or energy use
reduction as a part of many option of sustainability initiatives, may transform a company into a
competitive organization. If this sustainability initiatives are being achieve using company own
resources, from the perspective of resource based view, it will create a strategy which do not easy to
imitate by their competitor.

SUSTAINABILITY REPORT

Sustainability report is an information disclosure which reported the triple bottom line areas:
economic, environmental and social performance. In this report a company should disclose their
activities related to the environmental and social issues. In some reports, financial condition is also
included.

As have been mentioned before, that there are several different types of sustainability report,
however this research topic is focused on government reporting initiative which can be divided into
two categories: a report that only require company environmental data and a report that require
detailed analysis of company environmental performance (Dasgupta et al. 2007).

Toxic Release Inventory (TRI) for example, is a report which only gives information about the level of
pollutant produced by a particular industry or company, while PROPER (Program for Pollution Control
Evaluation and Rating) in Indonesia, Green Rating Project (GRP) in India and Ecowatch program in
Philippine are disclosed regular information about pollutant that produce by company, and also
provide performance evaluation.

PROPER, THE INDONESIAN GOVERNMENT INITIATED SUSTAINABILITY REPORT

Program for Pollution Control Evaluation and Rating (PROPER) is an Indonesian government program
aiming to reduce pollutant produced by industrial sector which existed since 1995 under World Bank
initiative (García et.al., 2009). The main concept of this program is asking companies to publish their
environmental performance to public, and the government will monitor it in order to control
pollutant.

The company participation is voluntary, and every company who participates in this program will then
be awarded a color code, as represent their environmental performance level. There are five different
colors used. Black is for company who perform below the government standard, while Red is given to
those who have made some efforts but still underperform. Blue is given to those who have achieved
environmental performance standard, and green is for the companies who are able to show the
environmental performance above government standard. Meanwhile for the highest level will be
given gold color. The gold is for outstanding environmental performance companies who have met
not only national standard but the international standard as well. This program has been used as a
model for a similar program in India and the Philippines (García et.al., 2009).

The PROPER can be considered as a government judgment to the company’s environmental

performance. The government might consider to take further step to control the industrial pollutant
by applying new rule or a standard if the result is below their expectation. From this perspective the
PROPER can be seen as a tool which can help Indonesian government reducing the environmental
degradation. By encouraging companies to disclose their environmental performance, government
will have a sufficient data which might needed to help them developing a policy to protect the
environment (Tietenberg, 1998). Government initiated reporting program usually has monitoring and
inspection mechanism to ensure that the company published the correct data and to reduce the
possibility of manipulation (García et.al, 2009; Huang & Chen, 2015).

THE INSTITUTIONAL THEORY: THE ROLE OF EXTERNAL PRESSURES

From organization perspective, government sustainability report may develop external pressures for
companies, as in general this report is used to influence public opinion (Tietenberg, 1998). Based on
the information which stated in the report, public can assess the risks of the pollutant that produced
by companies. Consequently, if the public perceived that they are exposed to a high environmental or
health risk, they can force the company to reduce the pollutant. How public enforce company to
reduce pollutant might be done with many ways. Public can create an action to refuse to buy
company’s product or to push government in order to perform a law enforcement. Public demand is
thus act as external pressure on top of the government regulation.

However, the the impact of public pressure depends on several factors such as company location and
ownership (García et.al., 2009). If the company is located in a densely populated area, the pressure
will be higher because there are more potential victims of company’s pollutant, thus they will have
more power to control the company (Tietenberg, 1998). Each company will also react differently to
external pressure, depending on the ownership type (García et.al., 2009). There are three different
company ownership: family owned, government, and national or multinational company. The
multinational company is more sensitive to public pressure (García et.al., 2009).

THE RESOURCES-BASED VIEW THEORY: MANAGING COMPANY RESOURCES

Resource –based view theory is dealing with the issue related to what companies have and what
companies can do. These two things have to be perfectly match in order to create something that
valuable to the company. In other word the company’s internal resources become a key factor in
developing sustainable competitive strategy (Russo, & Fouts, 1997)

Resource-based view theory are categorizing the type of resources that company have into tangible,
intangible and human resources category (Russo & Fouts , 1997). Tangible resources may include
physical asset and technology that the company used to produce products, such as machine and other
equipment. Meanwhile intangible asset is a reputation or company good will. And the last one is
company human resources. This category of resources may include organization culture,
communication capability, loyalty and also personnel performance (Russo & Fouts , 1997).

In order to improve company environmental performance, a company must use the resources that
they have. Some companies may prefer to use their tangible resources. For example by renewing
their production equipment with a new machine that can operate economically, the electricity use
might be reduced. Some other company may prefer to use their human resources to find a new
production method that can reduce waste and energy.

RESEARCH METHODOLOGY

This research is a case study research in nature, therefore to answer the research question, data will
be collected from a companies who participate with the government sustainability report or PROPER.
Company selection is based on non-probability sampling, therefore quota sampling will be used to
categorize companies according to their domicile.

The main data source is interview with company’s employees in charge to the task related to PROPER.
The interview will conducted with all level of employees, from decision makers until field workers. The
survey data, documents and researcher observation will be gathered as well in this research, in order
to see the phenomena from different point of view. After each type of data have been analyzed
independently, the whole result will be triangulated in order to compared and validate with other
data.

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