CHAPTER III: RESEARCH METHODOLOGY
3.8 Data collection procedures 37
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formula used for calculating ROA is inspired by Hackston & Milne (1996) who calculated a firm’s ROA as the firm’s net profit divided by total asset:
ROA = Net Profit/Total Assets ESG---Measuring SRI
Firm CSR performance has become an increasingly important criterion for Socially Responsible Investing (SRI) initiatives. Measuring CSR during the course of the past several decades, a large number of researchers have chosen to apply methods which attempts to measure overall CSR performance of firms, such as the KLD Index. The KLD Index (nowadays known as MSCI ESG Research) evaluates companies CSR performance based on eight different attributes (Waddock
& Graves, 1997; McWilliams & Siegel, 2000; Tang et al., 2012; Pätäri et al., 2014). KLD is a test that was used to find information of primary data source and have passed several test of va- lidity (Sharfman, 1996). The test was used to gather data from primary data source.
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3.10. Ethical Issues
This part discusses ethical issues to be considered in the study. Ethics are about the culture of doing what is morally and legally right in conducting research (Penslar, 1995). It should be ap- preciated that, research is a communal activity that should be carried with serious consideration of issues of ethics. In this study, ethical issues that were considered include voluntary participa- tion, informed consent, confidentiality, privacy and no harm to participants and permission to research, among other things, as further highlighted explained below:
3.10.1. Permission
In an effort to observe issues of ethics, clearance to carry out the study was soughed from the university. A courtesy application was made to the participating companies.
3.10. 2. Informed consent
Individual research participants got an honest briefing on the purpose and the nature of the study.
On the basis of this knowledge participants then asked either to agree or disagree on their own accord, to participate in the study. Participants were informed that at any stage into the study, they were free to withdraw from participation if for some reason, they feel like doing so.
3. 10. 3. Confidentiality
To ensure confidentiality research participants were asked to respond to either the questionnaires or interviews in the presence of others. Each respondent was asked to respondent to the questions asked on his/her own, without the involvement of others. At each company that will be visited, a separate room asked for and be used as a venue for interviews. Research participants were not allowed to have access to responses from other respondents.
3.10.4. Anonymity of data sources
In order to allow for anonymity of data sources, an effort was made to avoid mentioning the names of the research participants at any stage in this study. Even the names of firms from which the research participants were are drawn are not going to be mentioned to ensure anonymity of data sources.
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3.11. SUMMARY
This chapter outlined the research design, instruments used to collect the data and the techniques that were used in data presentation and analysis. The next chapter focuses on the presentation, analysis and discussion of research findings.
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CHAPTER IV
RESEARCH FINDINGS AND DISCUSSIONS 4.1 Introduction
The previous chapter presented the methodology. This chapter presents the research findings and the associated discussion of the findings. The discussion of the findings was linked to the litera- ture review in chapter two. This chapter provides the basis on which conclusions and recommen- dations of the study are made. For this purpose, secondary data was collected from the Zimba- bwe Stock Exchange website and from the company’s own websites and from the interview. The research is going to provide information from both quantitative and qualitative research ap- proach. The data for quantitative research is going to be obtained from the information from the Annual reports and the information for qualitative data is going to be obtained from the results obtained from the interview guide.
A. QUALITATIVE DATA ANALYSIS 4.2 Response rate
Table 4.2 Response Table from the Interview
Distributed Usable Response Rate
Interview Guide 100 100 100%
Out of the 100 interviews that were administered, the entire interview guides were answered and the companies provided their audited 2018 annual reports. This represents a response rate of 100 percent, which was considered sufficient forming a good representation of the whole population.
The researcher makes sure that she visited every company, which did not provide the annual re- port to get enough information for the study. This response rate is well above the 50 percent rec-
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ommended by (Mugenda & Mugenda, 2003). Babbie (1990) also supported Mugenda et al 1999 when he opined that, survey response rate is an important indicator of survey quality and Saun- ders posits a response rate above 60% is ideal.
4.3 Responsible Investment and Company Performance
a) Company following a formal Environmental Policy, specific waste, water, energy, and/or recycling polices and recognized energy management system
Figure 4.1 firm adaptation of ESG
Figure 4.1 shows that 90% have follow a formal Environmental Policy, specific waste, water, energy, and/or recycling polices and recognized energy management system while 10% do not follow a formal Environmental Policy, specific waste, water, energy, and/or recycling polices and recognized energy management system. The majority of the firms in Zimbabwe adopted the use of ESG. This shows high uptake of environmental policy. This difference of percentage is a risk premium that the other (reference or non-ESG) companies face and that investors should take into consideration when making investment decisions. Sustainable investments in non-ESG companies in these industries could bear as much as or more risk on an annual basis than invest- ments in ESG companies of the same industry on average. The study result is in accordance with stakeholder theory and legitimacy theory, where company has to keep relationship between its
90 10
frequency
yes no
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stakeholder by accommodating its stakeholder’s desire and needs, especially stakeholder that has power on resource availability which is used for company operational activity, such as labour, market of company product and others, while legitimacy theory focuses on interaction between company and society. Company participation in ESG initiatives program shows the company commitment to environmental management that will be useful for stakeholders and be expected to be able to increase stakeholder image specially consumers as resulting product users so that may increase company profit. This is in accordance with studies by Al-Tuwajri et al. (2003), Tu- an (2012) and Iqbal et al. (2013), proving that there is positive effect of environmental perfor- mance on financial performance, but not in accordance with studies by Lindrianasari (2007) and Sarumpaet (2005), which did not find any relation and effect of environmental performance on economic performance.
b) Company following an occupational health and/or global health & safety policy child and/or forced labor policy follow a human rights policy.
Figure 4.2 Company following an occupational health and/or global health & safety policy child and/or forced labor policy follow a human rights policy
As illustrated on figure 4.2 above, 65% have follow an occupational health and/or global health
& safety policy child and/or forced labor policy follow a human rights policy while 35% do not
0 10 20 30 40 50 60 70
yes no
frequency
frequency
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follow an occupational health and/or global health & safety policy child and/or forced labor poli- cy follow a human rights policy. The majority of the Firms ensuring the adoption of ESG initia- tives. The study result is in accordance with stakeholder theory, legitimacy theory, a theory valu- ing disclosure by companies in reaction to stakeholder request, but it is also useful to explain the reason why accounting report is viewed as social, politic, and economic documents. Political economic theory also recognizes social and environment disclosure in annual report as strategic tool to reach companies goals and can affect the attitude of stakeholders. The other theory in ad- dition to this study is signaling theory. This theory explains that there is a push to management for giving information to interested parties in order to reduce information asymmetry. In this theory, management motivation is to give information that is expected able to give shareholder’s prosperity description to outsiders. (Scott, 2009), so it can increase stakeholder’s trust which may increase company profit.
4.4 Environmental aspect on firm financial performance.
The researcher managed to ask question in an interview guide (see Appendix 1 below). From the interview responses I managed to write down overall verbal quotes indicated by different man- agers below. The first objective as stated in section 1.4 of chapter 1 sought to establish the extent to which SRI affects financial performance of the firms. Research participants were asked to re- spond to a set of issues in the data collection instruments. The respondents were subjected to in- terviews and findings of the present study are presented, analyzed below. It also emerged from the current study that, most the companies have indicated the importance of ESC for investors.
At times, many companies have understood the way for managing ESG factors which result in minimizing costs and mitigating risks, or potentially create opportunities to generate revenue.
The following verbal quotes of managers from different firms who were interviewed under this study show that ESG have negative impact to financial performance.
Firms are facing challenges to integrate environmental, social and governance criteria into the investment process to harvest the full potential of value-enhancing ESG factors that is why they are saying ESG is affecting their financial performance hence they should find a better way of operating this ESG initiative. From the interview about half 28 from industrial sector and 10 from Basic Material and 15 from Consumer goods managers supported the statement.
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From the interview 40 managers from industrial sector and 20 from Basic materials and 15 from financials and 5 from consumer services were in the view that Good environmental performance affects profits, as environmental performance improves, revenues rise and costs fall so that prof- its increase. These responses were supported by other 30 managers from industrial firms who indicated that they affect but by addressing the environmental factors through for example verti- cal integration, or moving production facilities, close, to suppliers can not only reduce green- house gas emission association but also reduce the costs hence delivering both environmental and financial benefits.
Most of the managers from 90 different firms were in the same vein that the yes, the profit of a company is affected by the firm’s production process when they are reducing the damages caused by the ESG activities. Nowadays it is vital for a company to practice good and user friendly activities when trying to reduce ESG costs. The managers should have more competent production methods which are environmental, social friendly. They further alluded that compa- nies with more or less ESG information perform equally as well as poorly. In addition, ESG is also not perceived as increasing firm value; in other words, they are similarly valued in the mar- ket.
However, most firms indicated that the effect of ESG on financial performance, but effective management, of environmental factors also is important in reducing costs. Nonetheless, some ESG risk mitigation efforts could result in high capital expenditure especially in short term.
This is consistent, with Saleh, Zulkifli, and Muhamad (2011) that shows negative relationship, between EGS and the firms’ financial performance. The ESG initiatives which are being used with which are the environmental initiatives with the Return on Assets (ROA) as well as the To- bin’s Q. According to Mahoney et al. (2007) and Al- Tuwaijiri et al. (2004) with the inclusion of environmental disclosure, there is a correlation between the ESG performance and the financial performance.
However, from the study one can conclude that the environment disclosure is one of the volun- tary disclosures, which leads to companies engaging in preserving the environment. For compa- nies to attract investors it is imperative that they have to work very hard and implement the envi- ronmental activities. The findings are in line with the Haslinda & Glen (2006) who argued that
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the engagement of environmental activities is an responsibility of business to attract investors.
Hence, it can be revealed that there is a relationship between total environmental disclosure and the profitability of a company.
4.5 Social aspect and firm financial performance.
The second objective as stated in section 1.4 of chapter 1 sought to explore social aspect on firm financial performance of corporates companies in Harare. Research participants were asked to respond to a set of issues in the data collection instruments. The following verbal quotes of man- agers from different firms who were interviewed under this study show that ESG have negative impact to financial performance.
From the interview the majority 40 from the industry category of the managers were in the opin- ion that Social Responsibility is the basic tool to the financial development of the firm in terms of attaining higher profits by adopting the process of taking community and society welfare in considerations by the firm.
Another group of managers from the industry category (20) also indicated that, yes it is a basic tool but it is only a duty to attract investments since they need firms who have social disclosures.
Some managers from customer goods services (10) indicated that it is just a way of impressing the government one is operating on the profit of the CRS cost are obtained in a long run.
In the same interview, the (50) from basic material and industrial categories managers were in the same vein indicating that if a company is maintaining their relationship with stakeholders thus leading to increase in.
Companies who engage in the implementation of CRS in the long run would perform better in its finances and because they are used to early costs they are obtaining high profits due to its long term period. Apart from that, it is noted that companies who also disclose the CSR activities just to enhance their brand image, popularity and to create a temporal illusion to be seen as responsi- ble corporate citizens; confirming the legitimacy theory. Since the main agenda for any organisa- tion is to achieve higher level of financial benefits, gaining a substantial competitive advantage plays a crucial role in determining that aim. As one of the step to gain that competitive advantage is through CSR attempts that yields to build a good and favorable position for firms in an ex-
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tremely competitive market. Therefore, it can be inferred that CSR comes along with financial benefits; significantly on ROA where it focuses more on image building, creating brand loyalty and in achieving market stability. This positive relation- ship can be further affirmed by directing that institutional investors, including some insurers (Rose, 2013), may recognize that non-
financial factors are appropriate and powerful considerations when it comes to investing. Weak positive relationship between CSR - ROE can be further justified through findings by Wa- woruntu et al. (2014); Ofori et al. (2014) that most of the stakeholders for insurance companies are made up of investors and shareholders whom are more concerned about the disclosure re- garding the economic and social aspects of the firm. Even it is a weak correlation relationship between CSR and ROE; it can concluded that, as the number of economic disclosure increase, there will be an increase in the profitability of the firm as well.
4.6 Stakeholders concern and firm financial performance
The third objective as stated in section 1.4 of chapter 1 sought to find out the effect of stakehold- er’s concern on firm financial performance of company. Research participants were asked to re- spond to a set of issues in the data collection instruments. The following verbal quotes of manag- ers from different firms who were interviewed under this study show that ESG have negative impact to financial performance.
From the interview managers from industrial sector were in the same vein that stake holders shareholders holds the most legitimate power to firm management thus own a firm virtue of owning equity shares.
Managers 20 from Basic material and 40 from consumer goods were in one vein indicating that stakeholders are owners with clear stake in success and failure of the firm and managers’ fiduci- ary is to maximize shareholders wealth because shareowners or investors provide capital thereby bearing more risk than other stake holders.
All the managers were in the view that it is wise to use the stakeholder management as they were agreeing towards the interview in the verbal quotes below
Yes, it is true that the economic approaches are anticipated to increased profits of the firm through stakeholder management models.
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In an interview done majority of managers indicated that Interaction among stakeholder contracts would permit firms to set up synergistic governance structures in order to more efficiently access valuable external resources in an emerging economy setting.
In this case, organizational reputation would be affected indirectly by stakeholder-oriented be- havior through organizational commitment. This possibility is in line with Walsh et al. (2013), who argue that organizational reputation stems from employee-client interactions, so that stake- holder-oriented behavior should ensure that employee actions address satisfaction and trust gen- eration on the part of stakeholders. Thus, paying attention to employee satisfaction and their ca- pacities is extremely relevant in order to achieve positive employee-client interactions and in turn, enhance favorable organizational reputation. In this vein, Helm (2014) stresses that organi- zational reputation management should consider actions aimed at engaging employees
B.QUANTITATIVE DATA ANALYSIS
The quantitative data analysis show the descriptive statistics of the dependent and the control variables used in the study for the period of 2018.Table 4.2 is a descriptive statistic of companies engaged in ESG used in the study. From the table 4.3 below the ROA mean for the sample firms are very low showing that the profit generated from the use of firms available resources. This illustrates that the mean value are indicative of poor performance in generating profits from the assets.
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Table 4.2- Indicators of ESG in companies as indicated by annual reports
INDICATORS OF ESG IN COMPANIES AS INDICATED BY ANNUAL REPORTS
SUBJECT NO OF COMPANIES
BENEFITS OF EMPLOYEES 62
EMPLOYEE WELFARE 32
ENVIRONMENTAL PROTECTION 20
DONATION TO COMMUNITY 18
HEALTHY AND SAFETY 55
ENVIRONMENTAL REHABILITATION 18
TRAININGS 70
Information from Annual report of 2018
Source: Zimbabwe Stock Exchange website and the company’s own websites.
As illustrated by the table 4.2 above, benefits of employee have been indicated by 62 companies.
Social issues appearing in the reports were predominantly concerned with companies' social re- sponsibility to their employees. 'Benefits to employees' included companies' contribution to em- ployees' pension, medical aid and social security schemes. 'Employee welfare' included reports on the provision of housing loans and scholarships to children of employees. 'Environmental pro- tection' and 'environmental rehabilitation' focused on reports about companies' efforts to reduce the negative impacts of their activities on the environment and efforts at finding solutions to the already damaged aspects of the environment. Minority have indicated the issues of donations and environmental rehabilitation. ESG performance is a reflection from company awareness to envi- ronmental management and a way to allocate its resources as a form of company attention to its environment. This is in line whit what Hart and Ahuja, (1996) indicated in their study that is ESG performance negatively affects financial performance that is proxies by ROA and ROE, and it is supported by stakeholder theory and legitimacy theory focusing on interaction between company and society that may increase benefit for both sides. ESG affects financial performance that is proxies by ROA and ROE, and it is supported by stakeholder theory, legitimacy theory, signaling theory, and political economic theory that recognize social and environmental disclo- sure in annual report as strategic tool to reach companies goals and can affect the attitude of stakeholders.