Environmental Costs and Their Impact on the Financial Performance of PROPER-Rated Manufacturing Companies: The Mediating Role of Environmental Performance

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Malang— Environmental Spending Fails to Boost Profits of Indonesian Manufacturing Firms. The research conducted by Mega Ayu Sekarwati, Triadi Agung Sudarto, and Endang Sri Andayani from Universitas Negeri Malang, published in January 2026 in the International Journal of Management Analytics.

The research conducted by Mega Ayu Sekarwati, Triadi Agung Sudarto, and Endang Sri Andayani revealed that environmental expenditures by manufacturing companies in Indonesia have not been proven to be able to improve financial performance, even though they have gone through official government assessments.

The study examined the relationship between environmental costs, environmental performance, and financial performance in manufacturing companies listed on the Indonesia Stock Exchange and participating in the PROPER program of the Ministry of Environment and Forestry. The results show that environmental spending, so far, has not provided a real impact on corporate profits.

Rising Environmental Expectations, Limited Financial Returns

Corporate priorities have shifted over the past decade. Profit maximization is no longer the sole benchmark of success. Companies are now expected to balance financial goals with environmental and social responsibilities.

Investors have also begun paying attention to environmental reputation, sustainability reports, and ESG indicators. However, this study shows that, in practice, environmental initiatives do not automatically translate into stronger financial outcomes—at least in the short term.

According to the authors, many firms still treat environmental spending as a compliance cost rather than as a strategic investment capable of delivering measurable economic value.

How the Study Was Conducted

The researchers analyzed manufacturing companies listed on the Indonesia Stock Exchange that participated in the PROPER program during the 2018–2022 period. Data were drawn from corporate financial statements, sustainability reports, and official PROPER ratings published by the government.

To simplify the analysis:

• Environmental costs were calculated as a percentage of environmental expenditures relative to company profits.
• Environmental performance was measured using PROPER ratings converted into numerical scores.
• Financial performance was represented by Return on Assets (ROA), a widely used indicator of profitability.

Using panel data regression and mediation analysis, the study assessed whether environmental performance acts as a bridge between environmental costs and financial performance. A total of 130 firm-year observations were included.

Key Findings at a Glance

The results are clear and consistent across multiple statistical tests:

• Environmental costs do not significantly improve environmental performance.
  Higher spending on environmental activities does not guarantee better PROPER ratings.
• Environmental performance does not significantly affect financial performance.
  Companies with higher environmental ratings do not necessarily generate higher profits.
• Environmental costs have no direct impact on financial performance.
  Spending more on environmental initiatives does not automatically increase profitability.
• Environmental performance does not mediate the relationship between environmental costs and profits.
  In other words, environmental spending fails to improve profits either directly or indirectly.

Statistically, environmental costs and environmental performance together explain only about 3.7 percent of the variation in financial performance. The remaining 96 percent is influenced by other factors such as operational efficiency, market conditions, innovation, and corporate strategy.

Why Environmental Spending Falls Short

The authors argue that the problem lies not in the concept of environmental responsibility, but in how it is implemented. Many manufacturing firms allocate environmental budgets primarily to meet minimum regulatory requirements.

From the perspective of legitimacy theory, environmental expenditures are often used to signal compliance and maintain public acceptance, rather than to achieve substantial environmental improvements. As a result, the spending becomes symbolic rather than transformative.

Moreover, the financial benefits of environmental initiatives tend to materialize over the medium to long term. During the study period, capital markets and investors in developing economies like Indonesia still prioritize short-term financial indicators, limiting the immediate financial rewards of environmental performance.

Implications for Business and Policymakers

For corporate leaders, the findings suggest that environmental costs must be integrated into core business strategies to generate financial value. Spending on pollution control alone is unlikely to improve profitability unless it is linked to green innovation, energy efficiency, or process optimization.

For policymakers, the study highlights the need to strengthen environmental governance frameworks. Programs such as PROPER may need to move beyond compliance-based assessments and place greater emphasis on long-term environmental outcomes and innovation incentives.

For investors and the public, the research serves as a reminder that environmental labels and sustainability disclosures do not always reflect short-term financial strength.

A Call for Strategic Environmental Investment

The authors emphasize that environmental responsibility should not be abandoned simply because short-term financial gains are unclear. Instead, companies should rethink how environmental costs are planned, managed, and communicated.

When environmental initiatives are aligned with innovation, corporate governance, and long-term strategy, they are more likely to deliver both environmental and economic benefits.

Author Profiles

• Mega Ayu Sekarwati, S.Ak. - Universitas Negeri Malang.
• Triadi Agung Sudarto, S.E., M.Si. - Universitas Negeri Malang.
• Endang Sri Andayani, S.E., M.Si., Ak. - Universitas Negeri Malang.

Research Source

Sekarwati, M. A., Sudarto, T. A., & Andayani, E. S. (2026).
Environmental Costs and Their Impact on the Financial Performance of PROPER-Rated Manufacturing Companies: The Mediating Role of Environmental Performance.
International Journal of Management Analytics, Vol. 4 No. 1, pp. 147–162.
DOI: https://doi.org/10.59890/ijma.v4i1.297
Official URL: https://dmimultitechpublisher.my.id/index.php/ijma