Journal of Accounting Auditing and Business – Vol.1, No.1, 2018 10.24198/jaab.v1i1.15656

The Development of Environmental Performance and Environmental Compliance

Sofik Handoyo Department of Accounting – Faculty of Economics and Business Universitas Padjadjaran

Abstract: This study aims to analyze the development of Indonesia environmental performance and environmental compliance from the period 2011-2015 through the PROPER program. Statistic descriptive, along with trend analysis, was applied in this study. The result indicates that achievement of the environmental performance of the PROPER program is on adequate level (63,2%), Poor level (25,9%), good level (7,5%), very poor (2.8%) and excellent level (0.6%). Meanwhile, Indonesia environmental compliance level on average is 72%. There is still 28% of the PROPER participant not comply with environmental requirements determined by the Ministry of Environment (MOE). The achievement of environmental compliance consists of beyond compliance (12%) and adequate compliance (88%).

Keywords: Environmental performance; Environmental compliance; Proper program, Compliance; Beyond compliance

Introduction

As a country with economy power a potential subject of receiving critics related continuously growing, Indonesia has turned to environmental issues. Environmental gradually to be an industrial country. It is issues are frequently lifted as argumentation indicated by Indonesia position on a list of 20 by developed country to ban developing countries that have a significant influence in countries in terms of their involvement in terms of their economy. However, international trading. Therefore, keeping Indonesia’s industrial expansion has brought business entities always complying to the with it mostly uncontrolled industrial wastes international standard of environmental and pollution, leading to severe protection is fundamental. In this case, the environmental degradation (Makarim and role of government is pivotal in order to Butler, 1996). Indonesia rapid maintain an image as an industrial country industrialization, population growth, and with the environmental friendly trademark. have created severe pollution Since environmental problems rose to problems (Blackman, 2004). As the structure prominence in the last third of the twentieth of Industrialization in Indonesia is very much century, the nation-state has been an active dependent on natural resources, Indonesia is scale of governance for addressing them

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(Fiorino, 2011). Sustainability economy, significant factors made command and along with sustainability environment, is a control approach failed (Makarim et al., dream of a global society. The momentum of 1995, Afsah et al., 2009, Garcia et al., 2008 sustainability economy was triggered by the and 2009). Meanwhile, business entities World Commission on Environment and argue that complying to environmental issues Development in the late 1980s and Rio de is costly. Therefore, they need an incentive as Janerio Earth Summit of 1992 (Fiorino, a return of investment in any part of the 2011). Declining environmental quality, business process related to environmental global warming, climate changes, natural issues. Based on these circumstances, the disaster are considered as the impact of government needs a new alternative to cope irresponsible economic activities. Indonesia, ineffectiveness of command and control as part of the world community, has a environmental protection program. responsibility to make the world a better As a response to weakness command place for living along with economic and control environmental program and to development. As a member of G20 and support agenda sustainability economic , Indonesia has a development and sustainability environment, responsibility to contribute in terms of in June 1995, Indonesia Ministry of preventing business activities that are the Environment (MOE) launched the PROPER damaging environment. Triple bottom line program. PROPER program is a program for agenda (People, Planet, and Profit) is in a pollution control, evaluation, and rating vision of the Indonesia government to be (Makarim et al., 1995). The Program was achieved. The concern of the Indonesia designed to use public disclosure, government to environmental issues was environmental awards, and reputational reflected by forming institution such as incentives as the motivating forces for BAPEDAL (Environmental Impact environmental improvement (Afsah et al., Management Agency) and issued several 2011). The basic idea of PROPER was to use environmental laws and regulations intended public disclosure of firms’ environmental to protect the environment from harmful indicators as a substitute for enforcement impact of business activities (Garcia et al., 2009). Under the PROPER The first policy of Indonesia in terms program, businesses entities are rated by the of action to prevent the negative impact of environmental impact agency of MOE, based industrialization was applying command and on clearly articulated criteria. The results of control approach. The government releases this rating are reflected in a single index that specific rules and regulation related to is widely publicized (Makarim and Butler, environmental protection, and the business 1996). entities were expected to comply with those The environmental authority rules and regulation. However, this approach understood that disclosing raw data could did not work effectively to make business create interpretation problems among the entities comply with environmental rules and public ( Garcia et al., 2008), therefore, the regulation. Countries such as Indonesia face color rating system was designed to be simple a tough challenge in choosing and designing enough to be easily understood by the public policy instruments to deal with industrial and still convey enough information to pollution (Garcia et al., 2008 and 2009). On influence behavior (Lopez et al., 2004, the side of government, weakness of law Makarim and Buttler, 1996). A color-coded enforcement, limited budget for controlling rating scheme was developed under the and monitoring were considered as PROPER program to grade factories’

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performance against the regulatory standards media. Due to extensive range stakeholder (Kanungo and Torres, 2003). Environmental involvement, the PROPER program is also performance of companies is mapped into a called as public disclosure for environmental five-color grading scale; gold for excellent, performance. For the companies involved in green for good, blue for adequate, red for the encasement of PROPER program, it can poor, and black for very poor. Based on be used as an image company building and PROPER color index, MOE classifies gold, expected can increase the value of the green and blue as environmentally comply. company. For MOE on behalf of the Meanwhile, the red and black color index is Indonesian government, the PROPER not complying to the environment program is a form of real action to create Furthermore, categorization of balancing both sustainability economy and environmentally comply itself is divided into sustainability environment. two forms, beyond compliance for gold and PROPER program is an innovative green color index and adequate compliance attempt to mitigate the problems associated for the blue color index. Adequate with pollution under the umbrella of the compliance criteria are a minimum standard government of Indonesia’s environmental to be achieved by PROPER participants in impact agency (Kanunggo and Torres, 2003). order to be awarded environmentally comply. The program’s objective is to act as a The criteria include environmental regulatory mechanism which can promote documents and reporting requirements, water and enforce compliance with pollution pollution control, management of hazardous control standards, encourage pollution and toxic waste, seawater pollution control, reduction, introduce the concept of “clean and potential of land degradation (MOE, technology,” and promote an environmental 2013). management system through the use of If adequate compliance criteria are incentives and transparency (Kanunggo and essential criteria to be called environmentally Torres, 2003). comply, the beyond compliance criteria is Indonesia’s program for pollution more dynamic because it is adapted to the control evaluation and rating (PROPER) was development of technology, the application the first significant initiative in the of best practices in environmental developing world that used information management practices and global disclosure to reduce industrial pollution environmental issues (Arsyad, 2012). (Garcia et al., 2009). The PROPER program Beyond compliance criteria includes; the was built on the premise that the mechanisms implementation of an environmental of public disclosure and accountability, management system, energy efficiency transparency in operations, and community efforts, efforts to reduce emissions, the participation will empower local implementation of reduce, reuse and recycle communities to achieve effective and of hazardous and toxic waste, the sustained pollution control practices implementation of reduce, reuse and recycle (Kanunggo and Torres, 2003). of solid non-hazardous and toxic waste, water As an environmental performance conservation and wastewater pollution, load index of one country supposes to be related to reduction, the protection of , the environmental performance of business community development program (MOE, entities in that country, then the question is 2013) pointed to the effectiveness of the PROPER The results are disseminated through program itself. Therefore, we need to the website of MOE and various publication understand more in detailed the performance

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development of the program for pollution Research Methodology control, evaluation, and rating (PROPER). Despite positive opinion from the This study applied the descriptive- international sphere about effectiveness quantitative approach. The quantitative data PROPER program, however, there are still are presented in particular formats such as a limited studies that analyze PROPER table, graph, and diagram. The information is achievement in national level in term of its verbally analyzed using trend analysis environmental performance level and approaches. This study used secondary environmental compliance level. Therefore, quantitative data to be analyzed. The data was the research question of this study is to collected from the open publication of MOE, address the achievement of Indonesia which is from the official website of MOE. environmental performance and compliance The period of observation is from 2011-2015. under PROPER Program. For the measurement level of environmental The PROPER program has been two performance and level of environmental decades running since its first-time compliance, formula from MOE was introduction in June 1995. Many adopted. appreciations and praised addressed to Level of Environmental Performance implementation of the PROPER program. (LoP) was measured from the percentage of However, a clear picture of the progress and the number of PROPER rating each category achievement of the PROPER program is not (excellent, good, adequate, poor and very quite well discussed in the academic sphere. poor) of total PROPER participants. The Plenty of studies revealed the relationship brief formula to calculate the level of between good corporate governance, stock environmental performance adopted from price, profitability, and PROPER MOE is presented as follows: achievement. However, there is very limited information about the current standing of achievement of the PROPER program at the national level. Therefore, there is a need to PROPER Rating each category understand the development of LoEP = 푥 100% environmental performance and Total PROPER Participant environmental compliance under the Meanwhile, measurement of Level of PROPER program. General-purpose of this environmental compliance (LoEC) was study is aimed to give exposure of Indonesia calculated from the percentage of program for pollution control, evaluation and accumulation environmentally comply rating (PROPER) and presenting current PROPER rating of total PROPER standing of environmental performance and participants. Environmentally comply rating environmental compliance of Indonesian consists of excellent rating (E), good rating companies participated in the PROPER (G), and adequate rating (A) Detail of the program. Specific purposes of this study are formula is presented as follows: to identify and measure PROPER participants in term of two aspects, first, the development of environmental performance level and second, the development PROPER Rating E + G + A environmental compliance level. LoEC = x 100% Total PROPER Participant

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Results and Analysis and not for profit organization. Even though the program itself requires no obligation in Environmental Performance terms of involvement for the organizations, however, the participants of the PROPER PROPER program is a voluntary program indicates increasing trend every environmental program assessment for year. Graphic 1 shows that there is a positive business enterprises, governmental agencies, trend of PROPER participant each year from the period 2011 – 2015

Graphic 1. PROPER Program Participants 2500

2000 2076 1500 1780 1882 1000 1299 990 500

0 2011 2012 2013 2014 2015 Sources: Adapted from MOE publication

The increasing trend is 31% for buy a product or services. Involvement in the period 2011-2012, 37% for period 2012- PROPER program could be an organization’s 2013, 5% for period 2013-2014 and 9% for strategy to attract customers. period 2014-2015. It takes the implication PROPER participants have measured that business enterprises, governmental their environmental performance into five agencies, and not for profit organization in categories, namely excellent, good, adequate, Indonesia consider seriously about poor and very poor. The distribution of environmental issues. Initiative to voluntary environmental performance in terms of the involve in PROPER program assessment is number of achievement each category is possibly driven by understanding among presented in table 1. Table 1 depicts that the them that nowadays, the organization should most noticeable progressive PROPER level not only concern about products or services of environmental performance is adequate they provide, but also the responsibility to and poor. Meanwhile, excellent, good and environmental issues. The more educated very poor level is relatively no significant customers, the more rationale customers changes from time to time make a decision about their preferences to

Tabel 1. Proper Rating Distribution Environmental Rating 2011 2012 2013 2014 2015 Excellent 5 12 12 9 12 Good 106 119 113 121 108 Adequate 603 806 1099 1224 1406 Poor 233 295 551 516 529 Verry Poor 48 79 17 21 21 Total 990 1299 1780 1882 2076 Sources: Adapted from MOE publication

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If we briefly look at the increasing The trend of the PROPER participant number of PROPER adequate ratings, the from 2011 to 2015, as mentioned in figure 1 first impression may be sound good to the shows that the number of PROPER readers. However, these number can lead us participants increased each year significantly. to misjudgment if not carefully understand Based on that information, if it is associated the profile of PROPER participants each with the data on table 1, we can assume that year. The increasing number of an adequate majority of new PROPER participants mostly rating does not mean that there is an fall into adequate and poor rating and there is upgrading level of environmental not significant upgrading rating of excellent performance, and increasing poor rating is and good rating. Especially for excellent and not always associated with the downgrading good rating achiever, the number indicates of environmental performance. The relatively the same even decreasing in a increasing number is actually driven by the certain period. It implies that for most number of PROPER participants that PROPER participants, it is challenging to increased every period. Therefore, we need to upgrade their environmental performance analyze more detail each PROPER from low level to upper level (good to achievement relative to the total participant. excellent, adequate to good, poor to good)

Table 2. PROPER Level of Environmental Performance Environmental Rating 2011 2012 2013 2014 2015 Average Excellent 0.5% 0.9% 0.7% 0.5% 0.6% 0.6% Good 10.7% 9.1% 6.3% 6.4% 5.2% 7.5% Adequate 60.6% 61.5% 61.3% 64.7% 67.7% 63.2% Poor 23.4% 22.5% 30.8% 27.3% 25.5% 25.9% Very Poor 4.8% 6.0% 0.9% 1.1% 1.0% 2.8% Sources: Adapted from MOE publication

Table 2 depicts the result of the in trend indicate not significant in terms of PROPER level of environmental the number. Therefore, we can use the performance by each category relative to the average number to identify the level of the total PROPER participant. If we look at the environmental performance of the PROPER number, there is a trend of decreasing program. PROPER performance level for good and Based on data presented in table 2, we very poor. In contrary, adequate can analyze that the average level of environmental performance level tends to environmental performance indicates that the increase. Meanwhile, the others (excellent majority (63,2%) of proper participants is on and poor) indicates fluctuate trend. To get a an adequate level. On the second, third, visual understanding of the trend, the trend fourth and fifth rank respectively is poor level level of environmental performance is (25,9%), good level (7,5%), very poor level presented in graphic 2. The graphic shows (2.8%) and excellent level (0.6%). It that there is a decreasing and fluctuating indicates that the environmental performance trend from year to year; however, the changes of PROPER participants mostly is on the

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adequate and poor level. It means that level position if the level performance of environmental of PROPER participants is achievement lies mostly on good and still not in the ideal position. Environmental excellent level. performance is categorized in the ideal

Graphic 2. The trend of the PROPER level of Environmental Performance 80,0% 70,0% 67,7% 64,7% 60,0% 60,6% 61,5% 61,3% 50,0% 40,0% 30,0% 30,7% 27,3% 23,4% 25,5% 20,0% 22,5%

10,0% 10,7% 9,1% 4,8% 6,0% 6,3% 6,4% 5,2% 0,0% 0,5% 0,9% 0,7%0,9% 0,5%1,1% 0,6%1,0% 2011 2012 2013 2014 2015 Excellent Good Adequate Poor Verry Poor

Environmental Compliance adequate compliance if the achievement of environmental performance is only on MOE has certain standard to identify adequate rating. The rest, poor and very poor the compliance of that PROPER participants. environmental performance rating is counted Excellent, good and adequate environmental as environmentally not comply. The entities performance rating are classified as the categorized as environmentally not comply entities that comply with environmental issue with the PROPER participant that are not determined by MOE. Furthermore, MOE meeting with minimum requirement classifies compliance level in more detailed determined by MOE. Table 3 depicts the into two categories, adequate compliance and PROPER rating achievement from 2011 to beyond compliance. Beyond compliance is 2015. The data indicate that the level of awarded to the entities that achieve excellent environmental compliance fall between 69% and good environmental rating. to 73% and with average environmental Meanwhile, entities are rated as compliance on 72%.

Table 3. PROPER Rating Achievement and Level of Compliance 2011 2012 2013 2014 2015 Excellent 5 12 12 9 12 Good 106 119 113 121 108 Adequate 603 806 1099 1224 1406 Poor 233 295 551 516 529 Very Poor 48 79 17 21 21 Total Participant 990 1299 1780 1882 2076 Level of Compliance 72% 72% 69% 72% 73% Level of Compliance on Average 72%

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Sources: Adapted from MOE publication The trend of the level of compliance of them got compliance award, and the rest is relatively smooth from 2011 – 2015, except not. for the year 2013, there is a slightly Graphic 3 may give us visual decreasing trend. The data implies that from understanding that the trend of PROPER 2011-2015 on average, 72% of total PROPER environmental compliance is relatively participants are already complying with stagnant, even decreasing in a certain period. environmental issues determined by MOE. It It indicates that no significant increasing means that there are still 28% of PROPER environmental compliance performance in participants in category environmentally not the period 2011-2015. There are many logical comply. Even though the number of argumentations to explain the phenomena of PROPER participants that already comply stagnation of environmental compliance in with environmental issues relatively higher Indonesia. However, based on the data, we compared to those that are not, however, the can say that poor and very poor compliance trend is relatively stagnant. In environmental rating achiever are unable to other words, there is no improvement in upgrade to a higher level and the new terms of the level of environmental PROPER participants are fail to pass compliance between 2011 to 2015. It implies minimum requirement of environmental that new PROPER participants that are compliance determined by MOE voluntary involve in PROPER program, 72%

Graphic 3. Trend of PROPER Environmental Compliance

73% 72% 72% 72%

69%

2011 2012 2013 2014 2015

sake of environmental itself. Furthermore, Environmental compliance rating PROPER rating award is not commercially Program (PROPER) by MOE is voluntary for influential for the business organization to the organization in terms of its participation. create an image as an environmentally There is no severe consequence from MOE if friendly organization compared to an award the PROPER participant gets issued by ISO organization. However, those environmentally not comply rating. This argumentations to explain the phenomena of reason drives the PROPER participants not stagnation of environmental compliance are put particular attention on how to improve merely based on logical thinking. In order to their position from not environmentally get factual information to deal with that comply to environmentally comply. They question, further research should be may just show their participation as part of conducted in more detailed good citizenship motive, but not really for the The achievement of PROPER

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compliance with 72% on average may give was 88% on average. It means that 72% of the readers a good enough impression. PROPER participants that are categorized as However, to understand the quality of environmentally comply, 88% of them only compliance, the analysis more detailed is achieve an adequate level. The adequate level required. Graphic 4 depicts diagram chart of is the minimum level of environmental composition compliance level based on three compliance achievement. categories level, excellent, good, and Table 4. Gives more detail adequate. Most noticeable compliance level information classification of PROPER in that diagram chart is an adequate level compliance level into beyond compliance achievement. From 2011 to 2015, the and adequate compliance category compliance level with adequate achievement

Graphic 4. Composition of PROPER Compliance

100%

80% 90% 90% 92% 84% 86% 60% 40% 20% 1%15% 1% 13% 1%9% 1%9% 1% 7% 0% 2011 2012 2013 2014 2015

Excellent Good Adequate

Based on information stated in table with achievement environmentally comply 4, it indicates that on average only 12% of the majority only achieve the lowest level of PROPER participants that are categorized as compliance. It refers to an adequate level of environmentally comply achieving beyond environmental performance, which is compliance rating (excellent and good level compliance award that is given if the achievement). If the interpretation of PROPER participant was passing minimum compliance is based on its quality, it means criteria determined by MOE. It implies that that on average, PROPER compliance the achievement of 72% compliance is not achievement is adequate compliance quite impressive if it is revealed in more reaching 88% and 12% of the rest is beyond detail. The quality of compliance level is high compliance. Compliance with adequate if the majority of the PROPER participant is rating is the lowest level to be called on beyond compliance rating (excellent and environmental compliance. Therefore, we good) can say that PROPER participants awarded

Table 4. Compliance and Beyond Compliance

2011 2012 2013 2014 2015 Average Adequate Compliance 84% 86% 90% 90% 92% 88% Beyond Compliance 16% 14% 10% 10% 8% 12%

Sources: Adapted from MOE publication

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To get a visual understanding of the decreasing trend for beyond compliance level trend of quality compliance level, the data and an increasing trend for compliance level. from Table 4 is transformed into graphics It means that there is a decreasing quality presented in Graphic 5. From that diagram trend of PROPER environmental compliance chart, it can be noticed that there is a from period 2011 to 2015.

Graphic 5. The trend of PROPER compliance and PROPER beyond compliance

90% 90% 92% 84% 86%

16% 14% 10% 10% 8%

2011 2012 2013 2014 2015

Compliance Beyond Compliance

Referring to table 3, as mentioned Regarding the level of environmental before, the number of excellent and good performance based on its order, the rating was not in a decreasing trend. achievement of environmental performance However, the distribution of adequate rating on average respectively is adequate level was increasing significantly time by time. (63,2%), Poor level (25,9%), good level This condition, made beyond compliance (7,5%), very poor (2.8%) and excellent level level relatively decreasing to overall (0.6%). It indicates that the level of the compliance. It can be interpreted that environmental performance of Indonesia is decreasing quality of environmental dominated by adequate performance compliance for beyond compliance achievement. General understanding says (excellent and good rating) was not caused by that environmental performance is getting degradation, but increasing trend of adequate appreciation from the world community if the compliance level. The bottom line of that achievement is on level good and excellent. trend is that PROPER compliance level Therefore, there is a need to improve the achieved was dominated by an adequate level environmental performance of Indonesia to a of compliance, which is the minimum level higher level. In this case, the role of authority of compliance and for the beyond compliance like MOE is very pivotal. The PROPER (excellent and good rating) no significant program in the future should be no longer changes, even decreasing voluntary but an obligation. The authority should also consider the penalties for those Conclusion that are rated as poor and very poor environmental performance. By putting In general, we can conclude that penalties mechanism in assessing achievement of the environmental environmental performance, it will drive the entities to improve their environmental performance of Indonesia from the period 2011 - 2015 is at an adequate level. performance. In terms of environmental

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compliance level, on average, compliance will seriously consider taking necessary level of PROPER program from the period efforts in order to improve their 2011 – 2015 is reaching 72%. It takes the environmental compliance and implication that there is still 28% of PROPER environmental performance level program participant not comply with environmental requirements determined by References: MOE. Even though the number of the compliance level is pretty impressive; Afsah, Shakeb., García Jorge., and Sterner, however, in terms of quality of compliance, it Thomas. The Institutional History Of shows poor achievement. A total number of Indonesia’s Environmental Rating 72% environmentally comply consists of And Public Disclosure Program 88% adequately compliance and 12% beyond (Proper). 2011 compliance (excellent and good). It explains that the majority of PROPER participant that Arsyad, Ibrahim. The Gold for Green. is rated environmentally comply by MOE Publication Series Ministry of only achieve the lowest level of compliance. Environment of Indonesia. 2012 In terms of the trend of environmental compliance achievement, from 2011 to 2015 Blackman, Allen., Afsah, Shakeb and there is no indication of an increasing trend, Ratunanda, Damayanti. How Do even decreasing in a certain period. Public Disclosure Pollution Control Analysis of both the PROPER level Programs Work? Evidence from of environmental performance and PROPER Indonesia. Human Ecology Review, level of environmental compliance indicates Vol. 11, No. 3, 2004 a stagnant trend of performance. The PROPER program is very much relying on Fiorino, Daniel J. Explaining National social punishment as the impact of public Environmental Performance: dissemination of rating. However, it seems Approaches, Evidence, and that the mechanism of public dissemination Implications. Policy Sci (2011) did not work correctly to upgrade compliance level and environmental performance level. García, Jorge H.,Shakeb Afsah, and Sterner, Therefore, the Indonesian government, in this Thomas. What Kinds of Firms Are case, through MOE, should take necessary More Sensitive to Public Disclosure actions related efforts to improve the level of Programs for Pollution Control: The environmental compliance and level of Case of Indonesia’s PROPER environmental performance. Those actions Program. Environment for refer to actions such as giving fines or Development Discussion Paper stopping operation permits for entities that Series, March 2008 obtained not compliance predicate. In order to improve performance from compliance to García, Jorge H.,Shakeb Afsah, and Sterner, upper-level compliance, which is beyond Thomas. Public Disclosure of compliance, MOE can issue a regulation to Industrial Pollution: The PROPER forces effort of adequate and good Approach for Indonesia? Working compliance receiver to upgrade their Papers In Economics, No.414. compliance level. With instrument such as Department of Economics School of fines, operational permits, and regulations are Business, Economics, and Law at the expected that PROPER program participant University of Gothenburg. 2009

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