11.pp.0054www.iiste.org call for paper-71

Issues in Social and Environmental Accounting
Vol. 1, No. 1, June 2007
Pp. 54-71

Legitimacy in Green: Pollution vs. Profit in
Canadian Oil Refineries

Vanessa Magness
Faculty of Business
Ryerson University, Canada

Abstract

This paper examines the correlation of financial and environmental performance in the petro-
leum refinery sector. Emissions fell while profits rose over a ten-year period. Ongoing efforts
to legitimize companies in light of changing societal expectations have created an external en-
vironment that encourages the development of new technologies that promote cost efficiencies
and good environmental performance simultaneously. Russo and Fouts (1997) argued that
industries subject to rapid technological advance are well suited to respond to these changes in
the external environment. The findings of this paper suggest that the petroleum refinery sector
of the oil and gas industry may be meeting the challenge of the environmental movement.

Key words: environmental performance, environmental accounting, legitimacy theory

Introduction penalties and court costs if they do not.
Insurance is harder to obtain, and more
Societal concern for environmental pro- expensive. Debt servicing costs are
tection has triggered a host of new chal- higher for companies that do not comply
lenges to corporate managers in the form with environmental regulation. Stake-
of new regulation and stakeholder ex- holders demand better disclosure of en-
pectations. Both have triggered costs vironmental management information,
that profoundly affect the business sec- and put downward pressure on equity
tor. For example, there are capital costs prices for companies that do not comply.
for pollution control equipment, ongoing
monitoring costs to ensure that emis- There are two competing views on the
sions stay within allowable limits, and impact of the environmental movement

Vanessa Magness is Associate Professor of Accounting at School of Business Management, Ryerson University, Can-
ada, email: vmagness@ryerson.ca

V. Magness / Issues in Social and Environmental Accounting 1 (2007) 54-71 55

on business activity. One says that pol- be part of the manufacturing sector.
lution abatement efforts divert resources This sector accounts for 18% of Can-
from the production of marketable out- ada's gross domestic product, and em-
put and lead to a decline in profit ploys 2.3 million people at salaries that
(Gollop & Roberts, 1983). The other are 22% above the Canadian average
says they lead to modernization of op- (Myers, 2005). The refineries are par-
erations and higher profits (Freedman & ticularly targeted for regulation. For
Stagliano, 1991). Empirical studies example, despite the fact that existing
have produced mixed results. This pa- refineries are operating at full capacity,
per explores this question within the and that recovery operations in the Al-
context of the Canadian oil and gas in- berta oilsands are expected to triple in
dustry. It is an integrated industry that by 2015 (Ollenbeger, 2005), no new re-
begins with the upstream exploration fineries have been built on the North
and recovery activities. Some oil is re- American continent in the past 25 years.
covered in Canada by conventional The Ministry of Natural Resources said
means, however the country is known that regulation is the primary disincen-
for its oilsands operations that entail the tive to build in Canada (Brethour, 2005).
removal of vast areas of forested land so The costs of regulation can be difficult
the layers of earth can be mined for the to assess (World Resources Institute,
deposits of crude trapped in the soil. 1995). They are known, however, to be
The downstream operations include the substantial. For example, in 1993 the
petroleum and petrochemical refineries, costs for refineries to satisfy environ-
which emit a variety of chemicals into mental regulations in the US were esti-
the air, earth, and water. The refineries mated to be $152 billion (National Pe-
are energy intensive operations, respon- troleum Council, 1993). In Canada, the
sible for a substantial portion of the cost of sulphur reduction regulation
greenhouse gases in this country. The alone is estimated to be $5.3 billion
largest firms in this industry participate (Purvin & Gertz, 2004).
in both upstream and downstream opera-
tions, as well as the production, trans- This research uses National Pollutant
portation and distribution of end product Release Inventory information (NPRI)
to the wholesale and retail markets. as a proxy for environmental manage-
Large, high profile firms such as these ment, and examines the correlation of
are subject to considerable public scru- NPRI releases with profitability over a
tiny and may be targeted specifically by ten-year period beginning in 1993. A
calls for regulation (Watts & Zimmer- regression of profitability on emissions,
man, 1990). The demand for controls on company size, and other independent
environmental impacts has been growing variables shows an inverse relationship
for several years. Walden & Schwartz between refinery profits and NPRI re-
(1997) said that 1989, the year of the leases.
Exxon Valdez oil spill, sparked the pub-
lic demand for corporate accountability The results of this study suggest that
for environmental impacts. compliance with societal expectations
can be accompanied by improvements in
This paper focuses on the petroleum re- efficiency, as was suggested by Freed-
finery operations, which is considered to man & Stagliano (1991). The key to

56 V. Magness / Issues in Social and Environmental Accounting 1 (2007) 54-71

these findings may lie in technological taining to stock valuation models. Capi-
advances that have been inspired by tal market theory says the price of a
changing societal expectations, and by share today is derived from the dis-
companies' efforts to legitimize them- counted stream of expected cash flows
selves in light of these changing de- (Fama, 1965). These cash flows, in the
mands. Russo & Fouts (1997) argued form of dividends or capital gains, will
that in industries subject to rapid techno- at some time accrue to the shareholder.
logical development, good environ- Changes in those expectations will affect
mental management and profitability can share price. For example, a decline in
be pursued simultaneously. Further ex- price may be caused by a reduction in
amination of the relationship of environ- the cash flows expected from future op-
mental and financial performance in erations, or by an increase in the correla-
other sectors of the oil and gas industry, tion of the individual stock returns with
or other countries, would be a natural the returns of the overall market (This
extension of this current work. correlation is referred to as the stock’s
beta). Based on the assumptions that
events which directly involve one com-
Literature Review pany will trigger industry information
transfers throughout the capital markets,
Prior research investigating the eco- thereby affecting the shares of other
nomic impact of regulation in general, companies in the same industry (Clinch
and environmental regulation in particu- & Sinclair, 1987), and that anticipated
lar, has tended to focus on three ques- changes in legislation (as could occur in
tions: the aftermath of an accident) affect in-
vestors’ expectations of future economic
1. How do shareholders react to the performance (Blacconiere & Patten,
threat of new regulation? 1994), numerous studies have looked for
2. How do they react to the imple- evidence that certain events affect share
mentation of new regulation? prices across an entire industry.
3. How does regulation affect profit-
ability or productivity? One methodology often employed in a
study of shareholder response is the
This current work focuses on the third event-study, where the event is defined
question. However, the literature that as an information shock in the capital
examines the earlier questions must also markets. Share behavior immediately
be reviewed since the results of this cur- after the event is contrasted with the be-
rent work may affect the interpretation havior prior to the event. Using event-
of these earlier studies. study methodology, Blacconiere &
Patten (1994) observed a price decline in
the shares of chemical companies imme-
How do shareholders react to the diately after the Union Carbide gas leak
threat of new regulation? in Bhopal, India. Share prices fell for
electrical utility companies with nuclear
Prior literature examining this question capacity in the days following the Three
has employed empirical tools of modern Mile Island accident in 1979 (Hill &
finance theory, particularly those per- Schneeweis, 1983). A separate study of


that same accident showed evidence of the textile industry, in response to Occu-
an increase in beta for competing com- pational Safety and Health regulation
panies (Bowen et al., 1983). A tailings that reduced allowable cotton dust limits
dam failure at a Placer Dome mine in (Freedman & Stagliano, 1991).
1996 was immediately followed by a
decline in the price of gold mining com- These reactions are consistent with
pany shares (Magness, 2007). Share- shareholders’ fear that new regulation
holder reactions like these may be has a dampening effect on future cash
caused by fears that a public outcry will flows. Company managers appear to
trigger a legislative backlash with new share this fear. In some industries, com-
cash flow impacts on economic perform- panies respond proactively to the threat
ance. of new regulation by policing them-
selves to show that additional legislation
is unnecessary (LaBar, 1988).
How do shareholders react to the im-
plementation of new regulation?
How does regulation affect profitabil-
When an accident occurs – such as the ity or productivity?
gas leak, the nuclear accident, or the
dam failure – the nature, timing, and The previous discussion suggests that
extent of the new regulation, if any, is share reaction is at least partially driven
unknown. This means that when share- by assumptions about the answer to this
holders react to the threat of legislation, third question, as this one focuses di-
they act with uncertainty. When legisla- rectly on economic impacts. Ironically,
tion finally comes, new information is this final question has received the least
available to the market, thereby prompt- attention: the basis for the argument that
ing investor reaction once again. Sev- shareholders do not like regulation be-
eral event-studies have examined share cause regulation lowers future cash
reaction to new legislation. For exam- flows has not been thoroughly evaluated.
ple, Moreschi examined the share reac- Some companies within an industry may
tion of pulp and paper companies in re- actually benefit while others suffer, de-
sponse to the Federal Water Pollution pending on the nature and structure of
Control Act Amendments introduced by the market. Differential responses may
the U.S. Environmental Protection be attributed to incremental profits ac-
Agency. He observed price declines, as cruing to some companies when regula-
well as beta changes (Moreschi, 1988). tory changes create barriers to entry
Other studies observed negative price (Pashigan, 1984; Maloney & McCor-
reactions in the chemical industry, when mick, 1982). In slow growing markets,
the Superfund Amendments and Reau- established companies are in a better
thorization Act was changed to expand position to satisfy new regulations than
the reporting requirements for firms that newer (smaller) competitors (The
release hazardous materials into the en- Economist, 1994). On the other hand,
vironment (Blacconiere & Northcut, new legislation may specifically target
1997); in the electrical utilities industry, the larger firms. This could be because
when it was targeted by the Clean Air the larger firms have the financial re-
Act Amendments (Hughes, 2000); and in sources needed to implement new con-


trol standards without undue restriction hand, Spicer (1978) found that better
in operations (Watts & Zimmerman, pollution control was associated with
1990). Furthermore, larger firms are return on investment for these compa-
subject to greater public scrutiny and nies.
may be targeted specifically by calls for
regulation (Watts & Zimmerman, 1990). Legitimacy theory and stakeholder the-
These issues make the overall financial ory together provide a conceptual foun-
impact of environmental regulation un- dation for a relationship between envi-
clear. ronmental management and financial
performance. Legitimacy theory es-
There are two competing views on how pouses a social contract between the cor-
business is affected by environmental poration and society. A company’s sur-
regulation. One says that environmental vival and growth depend on its ability to
legislation diverts resources from the deliver desirable ends: to distribute eco-
production of marketable output, and nomic, social or political benefits to the
leads to a decline in profitability groups from which it derives its power
(Bragdon & Marlin, 1972). The other (Shocker & Sethi, 1974). A company’s
says it leads to modernization of opera- right to exist can be revoked if it
tions, thus increasing plant efficiency breaches any of the terms of its social
and profit (Freedman & Stagliano, contract (Deegan, 2002). This revoca-
1991). Klassen & McLaughlin (1996) tion may be accomplished by consumers
proposed a theoretical model linking reducing demand for the company's
strong environmental performance with product or service, by suppliers limiting
good financial performance. Efforts to access to labor or financial capital, or by
identify a consistent positive correlation stakeholders lobbying for legislation that
of environmental performance with fi- would impact company cash flows
nancial performance, however, produced (Terreberry, 1968). Stakeholder theory
conflicting results. For example, pollu- maintains that shareholders benefit when
tion abatement reduced productivity in management meets the demands of mul-
both the brewing industry (Smith & tiple groups (Ruf et al., 2001). How-
Sims, 1985) and the electrical utilities ever, while the social contract contains
industry (Gollop & Roberts, 1983). explicit terms, spelled out in the form of
Klassen & McLaughlin (1996) identified legal requirements, it also has implicit
a positive correlation in a sample of terms, which include non-legislated so-
companies including manufacturing cietal expectations (Gray et al., 1996).
firms, electrical utilities, and oil and gas Because these terms are by their nature
extraction firms using share returns as a implied, managers vary in their interpre-
proxy for investors’ expectations of fu- tation of these social requirements, and
ture financial performance. However, in their response. Furthermore, these
Freedman & Jaggi (1992), using a vari- terms are subject to change.
ety of financial performance indicators
such as return on equity, return on as- Earlier empirical studies that examine
sets, cash flow to equity and cash flow the legislative repercussions of the envi-
to assets, and found no evidence to sup- ronmental movement and its impact on
port claims that it hurt profitability in the profitability have employed a variety of
pulp and paper industry. On the other


proxies for the key independent vari- ute to profitability. They suggested that
ables, such as, a company can obtain a competitive ad-
vantage by nurturing internal competen-
• the number of environmental cies (a combination of tangible items
charges a company has faced; such as plant and equipment, and intan-
• the number convictions a company gibles such as human resources, technol-
has faced; ogy, culture, and management skill) into
• the size of monetary penalties; and a proprietary resource. However, the
• the direct cost of complying with value of such a resource is driven at least
regulation. partly by the interaction of the company
with its external environment (Collis &
Each has its limitations. For example, Montgomery, 1995). This means that
the number of charges is driven as much the correlation between environmental
by enforcement efforts as by company and economic performance may be
actions, and thus may not truly measure driven to some extent by societal de-
the way managers are addressing envi- mand, which changes over time. Wal-
ronmental concerns (Illinitch et al., den & Schwartz (1997) said that 1989,
1998). Fines and convictions are driven the year of the Exxon Valdez oil spill,
by regulatory efforts too, as well as by marked a turning point in the public de-
companies’ efforts to defend themselves mand for corporate accountability for
in court (LaPlante & Lanoie, 1994). For environmental impacts. If they are cor-
this reason neither infractions nor fines rect, the external environment appropri-
and convictions reflect the pervasive ate for the development of a competitive
impact on operations of the environ- advantage based on effective environ-
mental movement. Compliance costs mental management may have devel-
would be a better proxy, but this cost oped in the 1990s. For this reason, the
information is not easily obtained. Fi- relationship between environmental and
nancial statements rarely show this in- economic performance should be revis-
formation clearly. While it may be pos- ited.
sible to obtain this information directly
from some of the companies, managers In summary, prior research has exam-
do not always have accurate data. For ined the economic impact of environ-
example, managers at an Amoco refin- mental regulation by focusing on inves-
ery in Virginia initially believed the cost tor response to the threat – and the im-
of complying with environmental regu- plementation – of legislation. In both
lation was about three percent of non- cases, negative share reaction is inter-
crude operating costs. A two-year study preted to reflect investors’ assumption
reassessed the figure at twenty-two per- that regulation is bad for business. Evi-
cent (World Resources Institute, 1995). dence as to the accuracy of this assump-
tion has thus far been inconclusive.
Russo & Fouts (1997) argued that some Changes in societal expectation of com-
of the earlier studies of the relationship pany performance, however, along with
between environmental and economic the changes in technology that these ex-
performance can be challenged on meth- pectations may have engendered, mean
odological grounds, for failing to control that effective management of environ-
for industry-specific factors that contrib- mental resources may now be an impor-


tant factor in determining company suc- 1978). Whether these capital market
cess. responses mean investors are expressing
concern that current (legal) behavior
may in the future be challenged by ex-
Model design panding regulation, or are merely ex-
pressing their personal values is a matter
This research explores the hypothesis of speculation. Nevertheless, these re-
that environmental management can be sults argue in favor of a measure for en-
good for business within the context of vironmental performance that goes be-
the Canadian oil and gas industry – spe- yond regulation or the cost of compli-
cifically, in oil refinery operations. Oil ance to include voluntary efforts as well.
and gas companies have a high public
profile among environmental groups, Two US studies have examined reac-
and are therefore specifically targeted tions to the first public release of Toxic
for regulation. Furthermore, as part of Release Inventory (TRI) data. This is a
the natural resource industry, petroleum US database disclosing the volume of
refineries play a significant role in the emissions of numerous substances from
Canadian economy. The findings of this manufacturing facilities operating under
study are therefore relevant to parties SIC codes 20-39, with 10 or more em-
both inside and outside the industry. ployees. These companies are required
to report their annual on-site releases
A rough configuration of the statistical and off-site transfers of each of over 300
model to examine the foregoing hy- specific chemicals. Hamilton (1993)
pothesis is as follows: noted an abnormal negative share price
response in companies that reported un-
Profitt- -= B-----0 + B---- expectedly high emissions in 1989, the
1EnvirPerformance + B2Control#1 + first year the data were released. Konar
B3Control#2+ … & Cohen (1997) found that those com-
panies whose shares suffered the most
Prior work has often measured environ- responded by reducing emissions more
mental performance in terms of legal than their peers. The authors used these
actions against a company, or the related findings to argue that public information
court costs. Problems associated with is “quasi-regulatory.” In other words, by
these choices of proxy have already been releasing information that might be used
discussed. Furthermore, shareholders to organize boycotts, lobby for addi-
have been known to react when compa- tional regulation, or bid share price
nies respond to environmental concerns, down, the government has effectively
even when regulatory action is not in- raised the cost of pollution, thereby giv-
volved. For example, shares of ing companies an economic incentive to
McDonalds rose when the company an- reduce emissions.
nounced it would reduce waste
(McMillan, 1996). Pulp and paper com- More recent studies have used TRI data
panies with better pollution control re- to investigate the relationship between
cords have higher price–earnings ratios, financial and environmental perform-
and lower share price volatility than ance (King & Lenox, 2001a; 2001b;
companies with poor records (Spicer, 2002). For example they found that fi-


nancial performance, as measured by to identify control variables that capture
Return on Assets and Tobin’s q, is the specifics of the operation. For exam-
driven by waste prevention (King & ple, each refinery is configured to pro-
Lenox, 2002). The Canadian equivalent duce a complement of products that
of the TRI is the National Pollutant Re- maximizes profit margins. This involves
lease Inventory (NPRI). Like TRI emis- taking the proximity of nearest markets
sions, NPRI emissions are not illegal. into consideration, and it implies that
Environment Canada collects the data two refineries will not necessarily be
not to punish companies, but as a means designed to produce the same outputs.
of assessing trends over time. Further- This means that volume of output cannot
more, emissions reduction is not a legis- be used as an activity control variable.
lative requirement. In this sense, it can However, the main feedstock for each of
be argued that the NPRI reporting re- these refineries is the crude itself. In
quirements embody the objectives of the this analysis, the total volume of crude
environmental movement, and reflect processed will be used as a size control
the extent to which companies address variable. Refinery-specific data were
some of the implied terms of the social unavailable, so the data were collected
contract. NPRI data are reported annu- on a per-company basis. A positive cor-
ally, quantified, and available electroni- relation with profit is anticipated.
cally, all of which simplifies the data
collection process. For these reasons, Productive capacity is tied to investment
the volume of NPRI emissions is used as in refinery assets. The refinery opera-
the key dependent variable in this study. tion is capital intensive, with the cost of
energy being the second highest operat-
The data collected span the years 1993 ing cost. Capital employed will be used
(the first year that NPRI data were avail- as a second control variable, to capture
able) to 2002. A statistically significant the impact of company size. The direc-
and negative emissions factor would tion of correlation of this variable with
support anecdotal reports that invest- profit is expected to be positive.
ments in effective environmental man-
agement earn superior long-term returns Time is included- in this paper as a trend
(Israelson, 1998). On the other hand, a variable, to capture the impact of uni-
significant and positive coefficient dentified factors that may be correlated
would support investors’ assumption with the dependent variable (Gujarati,
that efforts to reduce emissions decrease 1995) These factors could include
economic performance. changes in technology, energy effi-
ciency, or the cost of labor. The direc-
tion of association is indeterminate be-
Control variables cause the time variable Yeart captures
the aggregate impact of numerous fac-
The petroleum refinery process trans- tors.
forms crude oil, which is virtually use-
less in its natural state, into a wide vari- The model for this analysis is as follows:
ety of products such as propane, auto- NetInc-i,,t- -= B-----0 + B----1NPRIi,t
motive and aviation fuel, furnace oil, + B2Crudei,t + B3CapEmpi,t + + B4Yrt
lubricants, and asphalts. It is important [1]


where: Data description and discussion of
variables
NetInci,t is the net income (in mil-
lions of Canadian dollars) Total petroleum refinery capacity in
from refinery operations of Canada (measured in volume of crude
company i in year t; oil input) is about 1,855,850 barrels per
NPRIi,t is total NPRI emissions (in day in 2004. There were 19 petroleum
metric tons) from company i refineries in Canada in 2003, owned by
refineries in year t; 10 organizations. This excludes refiner-
Crudei,t is the volume of crude oil ies classified as upgraders, as well as
input (in millions of barrels) petrochemical refineries. Of the 19 pe-
processed by company i in troleum refineries, those operated by
year t; private companies were eliminated from
CapEmpi,,t is total capital employed (in this study because of difficulty in obtain-
millions of Canadian dol- ing financial performance data. Refiner-
lars) in refinery operations ies belonging to US companies were
for company i in year t; and, also eliminated, in order to avoid com-
Yrt is the year, ranging from plications that could arise from the dif-
1993 to 2002. ferences between US and Canadian fi-
nancial reporting guidelines. Data were

Table 1
Companies Included in the Regression Analysis
Total production capacity
Company Name No. Refineries
(barrels of crude input per day)
Husky 2 35,250
Imperial Oil 4 502,200
Parkland 1 6,000
Petro-Canada 4 313,200
Shell 3 299,200
Sunoco 1 78,000
Subtotal 15 1,233,850

Companies Excluded (Each with one refinery)
Total production capacity
Company Name (barrels of crude input
per day)
Valero (a US company; formerly Utramar, in Quebec) 215,000
Irving Oil (private Canadian company in
250,000
New Brunswick)
North Atlantic Refinery (private Canadian company in
105,000
Newfoundland)
Chevron/Texaco (US company operating in BC) 52,000
Subtotal 622,000


collected from the remaining six compa- company until 2000. Husky's annual
nies (15 refineries) identified below: reports contain sufficient historic infor-
mation to provide data for the years
1. Husky Energy, with refineries in 2000 to 2002 only. Parkland required
Lloydminster and British Columbia; special treatment (discussed below) be-
2. Imperial Oil, with operations in cause of its size. Parkland sold its refin-
Nova Scotia, Ontario, and Alberta; ery in 2000. For this reason only eight
3. Parkland Industries, in Alberta; years of data are available for this com-
4. Petro-Canada, with refineries in Al- pany.
berta, Ontario, and Quebec;
5. Shell Canada, in Quebec, Ontario, Based on the six companies included in
and Alberta; and this analysis, the total dataset includes
6. Sunoco, in Ontario. 51 company-year observations. Addi-
tional detail about the measurement of
The refineries included in this study ac- the individual factors in model [1] is
count for a production capacity of provided below.
1,233,850 barrels per day (see Table 1),
or about 66% of total capacity in Can- NetInci,t For the integrated companies,
ada. the net income from refinery
operations is shown in the seg-
Refineries classified as upgraders use a mented disclosures either in
higher density feedstock which is much the financial statement notes,
heavier and cheaper than the crude used or in the Management Discus-
by the petroleum refineries. For exam- sion and Analysis section of
ple, in early October 2004, Cold Lake the annual report. The annual
heavy crude cost about $29 US per bar- report of Parkland Industries,
rel, compared to about $54 US for the the smallest company in the
lighter West Texas Intermediate crude analysis, did not provide the
used by the petroleum refineries. Up- level of detail provided by the
graders were excluded from this study other companies. While Park-
because the influence on profit of these land operated one refinery up
diverse input costs would complicate the until 2000, its main business
analysis. Petrochemical refineries were was marketing gasoline, and
also excluded. This is a separate pro- the company did not disclose
duction process downstream from petro- petroleum refinery operations
leum refinery operations. as a separate segment. For this
reason an estimate of NetInci,t
Most of the refineries are owned by for Parkland Industries was
large integrated companies whose opera- based on the proportion of
tions include exploration and recovery, sales volume for which cost of
petroleum refining, petrochemical refin- sales was produced internally.
ing, and retail marketing. Ten years of NPRIi,t Each refinery has a specific
data (1993 to 2002) were collected for NPRI Site Identification num-
all of the integrated companies except ber. The annual emission vol-
Husky Oil and Parkland Industries. umes (in metric tons) of each
Husky did not become a publicly traded reported substance are aggre-


gated into a single figure. For Parkland, the information
companies with more than one came directly from the balance
refinery the NPRI emissions sheet.
from each refinery are aggre-
gated into a single number. Summary statistics are shown for the
(This adjustment was neces- independent variables in Table 2. Given
sary because refinery-specific that refineries are built to accommodate
financial performance infor- a specified crude input capacity, that
mation was not available.) management wants to run the refineries
Crudei,t Volume of crude processed at or near full capacity each year, that
was obtained from the annual higher volume of production means
reports. greater emissions, and that volume is a
CapEmpi,,tThis is the investment cost of factor in model [1], correlations between
refinery assets less accumu- Crudei,t, CapEmpi,,t,. and NPRIi,t. are
lated amortization. likely to be high. The correlation matrix
(Technological innovation re- in Table 2 confirms this expectation. In
quires ongoing investment in order to avoid issues arising from multi-
these assets, as discussed later collinearity in the data, CapEmpi,,t,. and
in this paper, such that net in- NPRIi,t are each regressed against vol-
vestment increases over time.) ume (Crudei,t), and the residuals from
The integrated companies pro- each regression are used in place of the
vided this information in their original data in model [1].
segmented disclosures. For
Table 2
Summary Statistics for Independent Variables
N = 51
Variable Mean St. Dev. Minimum Maximum
NPRIi,t 4600 11963 21.52 77482
CapEmpi,t 1361 946 24 3027
Crudei,t 76 58 1.6 164
Description of Variables
NPRIi,t Total National Pollutant Release Inventory emissions (metric tons)
CapEmpi,,t Total cost of capital employed, in Canadian dollars (millions).
Crudei,t Barrels of crude input as feedstock (millions)

Correlation Matrix

NPRIi,t 1.000
CapEmpI,t 0.3031 1.000
Crudei,t 0.3029 0.9561 1.000
NPRIi,t CapEmpI,t Crudei,t


4. Results model. The key independent variable
NPRIi,t is statistically significant at α =
Regression results are shown in Table 3. 0.05, and negative. These results argue
All control variables are statistically that when aggregate NPRI emissions
significant at α = 0.05 or less, with signs drop by one metric ton (while size of
in the direction anticipated. About operation and volume of crude input are
sixty-six percent of the variation in controlled), the income from petroleum
NetInci,t is explained by variation in the refinery operations rises by about two
independent factors identified in this thousand dollars.

Table 3
Results of Linear Regression Analysis

NetInci,t = B0 + B1NPRIi,t + B2Crudei,t + B3CapEmpi,t + B4Yrt
where:
NetInci,t is the net income from refinery operations in Canadian dollars (millions)
NPRIi,t is total NPRI emissions (in metric tons), adjusted for volume
Crudei,t is the volume of crude oil input in barrels
CapEmpi,,t is total capital employed in refinery operations in Canadian dollars
(millions), adjusted for volume
Yrt is the year, ranging from 1993 to 2002

Expected sign Coefficient t-value
B0i Intercept +/– -28,878 -3.922***
B1i NPRIi,t +/– -0.002 -2.451**
B2i Crude-i,t + 0.001 8.854***
B3i CapEmpi,t + 0.087 2.545**
B4i Yrt +/– 9.878 2.779***

Significant at: α = 0.01*** α = 0.05**
R----2 = 0.66

These results conflict with the “dead loss pay equity, and child labor laws increase
expenditure” argument that says envi- the costs of doing business, environ-
ronmental legislation channels cash to- mental regulation also increases the cost
ward expenses that satisfy environ- of doing business. A reconciliation of
mental performance expectations, but the intuitively unacceptable finding that
does nothing to enhance the financial rising costs mean higher profit may
performance of the company (Gollop & come from Freedman & Stagliano,
Roberts, 1983). An explanation for (1991), who suggest that the moderniza-
these findings is not immediately obvi- tion of operations to meet environmental
ous. After all, just as minimum wage, control requirements leads to increases


in plant efficiency and profit. It should can lead to cost efficiencies as well as
be noted that the correlation between improvements in environmental per-
these two performance measurements, formance.
profit and emissions, is driven at least
partially by external factors such as so- Prior studies of the relationship between
cietal expectations (Russo & Fouts, financial and economic performance
1997). Possibly the ongoing effort to have produced equivocal results. Russo
legitimize business operations has trig- & Fouts (1997) said these findings are
gered the demand for technological ad- inconclusive because they are derived
vancements that include environmental from statistical models that fail to con-
impact considerations in the quest for trol for factors that contribute to profit-
higher production efficiencies. If this is ability. This study addresses that issue
the case, the conclusions drawn in ear- by focusing on a single industry seg-
lier studies that shareholders are op- ment, and by identifying profit related
posed to calls for environmental man- control factors specific to that segment.
agement are not incorrect. They are, The findings of this study support the
however, interpretations made in light of conclusion that over the ten-year period
current-day technology and current-day from 1993 to 2002, a decline in NPRI
mores. Changing social expectations reportable emissions has been associated
affect not only the regulatory environ- with growing profits. In other words,
ment, but also the drive for technologi- there is a positive relationship between
cal advancements. It is through such environmental and financial perform-
advancements that profitability and envi- ance.
ronmental performance – once consid-
ered irreconcilable – can now be consid- Russo & Fouts (1997) also argued that
ered simultaneously. industry growth plays a role in determin-
ing when good financial performance
and good environmental performance
5. Summary, discussion and sugges- can be pursued simultaneously. While
tion for future studies the use of new, unproven technologies
involves pay-off uncertainties, techno-
Prior literature shows that shareholders logical innovation is accelerated for in-
factor the perceived repercussions of dustries in a growth phase. While no
environmental legislation into share new petroleum refineries have been built
price. Regulation that limits allowable in North America since 1980 (in fact,
emissions restricts volume of activity some have been shut down) core petro-
and/or commits a company to significant leum technology continues to be devel-
capital cost and operating expenditures. oped, and net refinery capacity continues
For this reason, the environmental to keep up with a growing demand
movement has been accused of subject- through incremental expansion and tech-
ing firms to costs that satisfy legislative nological upgrades in existing refineries.
requirements at the expense of financial For example, the introduction of a pat-
performance. On the other hand, it has ented process to improve the perform-
also been argued that given the appropri- ance of the catalytic cracking units pre-
ate internal and external environment, sent in most refineries has increased
modernization of production facilities the yield of gasoline per unit feedstock


from 55% liquid yield to over 75% resource perspective (1995), which ar-
(Orr ,2004). gues that a positive correlation between
environmental performance and profit
Another reason that some of the earlier can be a distinct competitive advantage
literature reported contrary results – a available only to certain companies.
negative correlation of environmental Clarkson et al., (2006) have made some
with financial performance – could be progress here, with findings that a com-
time-related. A long-term orientation pany's financial liquidity and R&D ex-
toward environmental stewardship calls penditures contribute toward the deter-
for a commitment at all company levels, mination of a competitive advantage
including production planning, perform- across the US manufacturing sector. An
ance measurement, and product/process examination of this nature would be a
design, and management expertise in logical extension to the current study.
environmental stewardship can, over Furthermore, this study looks only at the
time, evolve into a proprietary resource. petroleum refinery section of the oil and
However, the value of such a resource is gas industry, and no assumption is made
driven at least partly by external factors that these findings extend to other parts
(Collis & Montgomery, 1995). As so- of the industry.
cietal demand for cleaner technologies
has grown over time, these technologies The findings of this paper could also tie
have become increasingly available. For into a related branch of environmental
example, the process of scanfining was accounting research – the examination
introduced about five years ago. This of disclosure versus environmental per-
process removes virtually all sulphur formance. The disclosure studies have
from gasoline at about one-third the en- produced evidence that is once again,
ergy costs of older processes, thus help- inconclusive. It has been argued on the
ing refineries to meet new regulatory one hand that companies use environ-
requirements while reducing their sec- mental disclosure to explain poor finan-
ond highest operating cost. It can there- cial results (Neu et al., 1998; Freedman
fore be argued that the environmental & Jaggi, 1988). On the other hand,
movement is a major social force that Cormier & Gordon (2001) found that
not only presents new challenges to companies in good financial health made
business, but also the opportunity to sat- greater financial disclosures. Possibly
isfy those challenges. In this way, envi- the correlation is industry specific. In
ronmental management has become a their analysis of social and environ-
legitimizing, value-creating activity, at mental disclosure, Gray et al. (2001)
least in some industry segments. have also identified time and industry
segment as important factors. By identi-
Many questions remain unanswered. No fying those industries for which environ-
effort has been made in this study to test mental performance has become a profit
whether or not the best environmental creating activity, as this current paper
performance (lowest emissions) is asso- begins to do, efforts to better capture
ciated with the best financial perform- the disclosure decision making proc-
ance. This paper does not attempt to find ess may be possible.
evidence in support of Hart's natural


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