Information about financial performance is an important thing for the company. Financial performance serves to assess the level of achievement that has been achieved by the company in its business activities. A company is considered to have good performance if the company is able to use resources effectively and efficiently, and consistently earn large profits. Financial performance is also said to be a determinant of the sustainability of a company in the future (Tunggal and Fachrurrozie 2014). 

In this modern era, getting the maximum profit is not the only benchmark for a company to be said to have good financial performance. Companies with high profits may not necessarily have a good impact on stakeholders. The large number of cases of environmental damage that occur as a result of business activities carried out by companies can lead to new problems, such as the big forest fire incident that occurred in Riau in 2014. The resulting haze caused tens of thousands of residents to develop respiratory diseases and make all school and flight activities closed for a few months (Linawati 2019). Furthermore, the case of land fires carried out by PT Rafi Kamajaya Abadi in Melawi Regency, West Kalimantan and PT Agri Bumi Sentosa in Barito Kuala Regency, South Kalimantan (Anugrah 2022). This forest burning is carried out as an “agricultural tool” to open up a new land for the company. PT Rafi Kamajaya Abadi and PT Agri Bumi Sentosa are not companies listed on the Indonesia Stock Exchange (IDX). The analogy is, if a small-scale company has damaged the environment, then a large-scale company (which is classified as the main board on the IDX) will certainly have greater consequences for environmental damage than small and medium-scale companies. Some examples of these problems will make the company's image worse in front of the community, so that the company will be threatened with not getting support from the surrounding community. This will also disrupt the survival and financial performance of the company.

In Indonesia, an agroindustry company is a company whose business activities are closely related to natural resources, where the implementation of Corporate Social Responsibility (CSR) is one of the obligations that must be carried out by the company. This is stated in Law Number 40 (2007) Article 74 paragraph 1 concerning Limited Liability Companies and in Government Regulation Number 47 (2012) concerning Social and Environmental Responsibility (TJSL). The government will put more emphasis on supervising the implementation of social responsibility in large-scale companies, especially those that have been listed on the IDX, because large-scale companies also have a large impact on the environment. In the concept of sustainability development, the sustainability of a company depends on how much the company can be responsible (both socially and economically) for the impacts arising from the company's operational activities. So, it can be said that disclosure of CSR by companies is one way to ensure the sustainability of a company (Lindawati and Puspita 2015). CSR can be said as an effort made as a form of company’s responsibility for some damage that occurs as a result of its business activities. The implementation of CSR is usually outlined in the form of activities related to the environment or social issues and will be disclosed by the company in their annual report or sustainability report. 

The number of environmental pollution cases that have occurred reflects that companies in Indonesia still don’t have a sense of concern for the environment. In order for the company to pay more attention to the conditions of the surrounding environment, the government under the Ministry of Environment and Forestry issued a Company Performance Rating Assessment Program (PROPER). According to the regulation of the Minister of Environment and Forestry Number 3 of 2014, PROPER is a program issued by the government in order to evaluate and monitor the compliance of a company in controlling environmental pollution and/or damage as well as processing waste generated from company activities. The environmental performance assessment system in PROPER uses a rating system consisting of five colors (Gayatri 2020).

Disclosure of CSR and environmental performance carried out by the company is an effort made by the company to be able to maintain the viability of the company. The viability of a company is not only influenced by shareholders, but also influenced by other stakeholders (Lee 2008). According to Freeman (1984), stakeholders are organizations or individuals who can be influenced or influence the company in achieving its goals. Therefore, apart from operating to fulfill its own interests, the company must also provide benefits to other stakeholders, because the company exists due to the support or role from stakeholders.

Moreover, to continue operating successfully, companies must act in accordance with socially acceptable rules (O’Donovan 2002). In that way, companies that carry out CSR disclosures and environmental performance will easily gain legitimacy from the community for their operational activities. This method is also believed to be a business strategy carried out by companies in utilizing CSR more effectively and efficiently to create competitive advantage and generate long-term profits (Munilla and Miles 2005). The better the disclosure of CSR and environmental performance carried out, the more stakeholders will provide support to the company for all its activities, and will have an impact on improving the company’s financial performance. It is also consistent with Lee's (2008) statement, that companies that behave in socially desirable ways will also do better financially.

Research conducted by Orlitzky et al. (2003) found that corporate social performance is positively correlated with financial performance using accounting-based measurements. Likewise, several previous studies have found that there is a positive relationship between CSR and company financial performance (Waddock and Graves 1997; Laily 2016; Ludfi and Firdaus 2017; Maqbool and Zameer 2018). Then, research by Tunggal dan Fachrurrozie (2014) found that environmental performance (using PROPER) has a significant positive effect on financial performance as well as Angelia and Suryaningsih (2015) and Haninun et al. (2018). However, on the other hand there are several studies which found that there is no effect between CSR on financial performance (Freedman and Jaggi 1982; Aupperle et al. 1985; Inoue et al. 2011; Rahmawati et al. 2017) as well as research results which found that environmental performance also has no effect on financial performance (Sarumpaet 2005; Horváthová 2010; Andriana and Panggabean 2017). This inconsistency of some of the findings from previous research makes this topic still interesting to study.

Stakeholder Theory

Donaldson and Preston (1995) argue that, based on a stakeholder theory, all parties related to the company are in an equal position, so that the goals of a company can be achieved if the company has strong relationships with all of its stakeholders. Stakeholders mean all parties, both organizations and individuals, who can influence or have an impact on the achievement of organizational or company goals (Freeman 1984). This stakeholder concept states that an organization will not survive or even exist without the support of several groups. Stakeholder theory seeks to explain that firms also have broader obligations beyond those assumed in traditional economic theory, where managers’ obligations are only concern about shareholders’ interests.

Legitimacy Theory

Companies are social creation whose existence depends on the willingness of the society to keep continuing their business operation (Relch 1998). Based on this statement, it can be said that the role of the community is very important for the sustainability of the company. Companies need recognition and acceptance (legitimacy) of their existence from the society who are also stakeholders. The concept of legitimacy of an organization, according to Dowling and Pfeffer (1975), is a condition or status that exists when an entity’s value system is aligned with the value system of the social system in which the entity is located. If there is a difference or gap between these two value systems, then the legitimacy of an entity becomes threatened.

Hypothesis Development

Based on stakeholder theory, when a company operates its business, the company must pay attention to all stakeholders, not only shareholders or creditors, but also the society, consumers, government, investors, and so on who are involved in the company’s operations. By taking into account the interests of all stakeholders, the company is expected to be able to maintain its business so that it continues to operate. It can be said that CSR is a proof about company’s concern and also attaches importance to social values that exist in the community, besides of the shareholders’ interests. A good CSR disclosure by the company is carried out so that the company gains positive image from stakeholders, so that stakeholders will provide full support to the company and acknowledge the existence of the company in the community.

In addition, investors will also assume companies that carry out CSR activities have good business ethics and are responsible for all of their stakeholders (Lindawati and Puspita 2015). As a result, the company will easily gain legitimacy and support from the society, as its biggest stakeholder. CSR disclosure conducted by the company will foster trust from investors and consumers. This will lead to an increase in the company’s sales as well as the profit to increase the company’s financial performance. This assumption is supported by Angelia and Suryaningsih (2015), Gantino (2016), also Maqbool and Zameer (2018) which state that CSR disclosure has a significant effect on financial performance.

H1: Corporate social responsibility disclosure has a positive effect on financial performance 

Many environmental damage that has been occurred has made this into a major issue which the whole community concern about it. It is possible that almost all investors are currently paying more attention to the company’s environmental performance as an investment decision, besides of its financial performance. Companies that have a good rating from PROPER (gold and green ratings), will receive a good response and get appreciation from the public, so that it will increase the trust of the public (Angelia and Suryaningsih 2015). 

Moreover, companies that use natural resources that are environmentally friendly, as recommended in PROPER, will spend less money to deal with the waste or emissions they produced or spend less money on preventive actions on the environment. This can reduce costs incurred by companies in terms of more efficient use of natural resources (cost efficiency). The more investors who invest in the company and good cost management from company management, it will affect the increase in company profitability. This statement is in line with research conducted by Angelia and Suryaningsih (2015), Laily (2016), and Haninun et al. (2018) which shows the results that environmental performance has an influence on the company’s financial performance.

H2: Environmental Performance has a positive effect on financial performance 

Data Collection

This study uses quantitative research methods and secondary data sources. Secondary data that is used are financial reports, annual reports, and sustainability reports (if any). This data will be collected through the Indonesian Stock Exchange (IDX) website or related company’s websites.

Population and Sample 

The population in this study are agroindustry companies that have been listed on the Indonesia Stock Exchange (IDX) during 2014-2018. Based on data acquisition, there were 21 agroindustry companies listed on the Indonesia Stock Exchange (IDX) during 2014-2018. The author uses a purposive sampling method to determine research sample, with the following criteria:

1. Agroindustry companies listed on the Indonesia Stock Exchange (IDX) and have published their financial reports for 2014 – 2018.

2. Agroindustry companies whose participating in PROPER during 2014 – 2018.

3. Agroindustry companies that have carried out CSR and published it in a sustainability report or annual report during 2014 – 2018.

It can be obtained that there were 9 agroindustry companies that meet the sample criteria using purposive sampling method.

Research and Measurement Variables
Corporate Social Responsibility Disclosure (CSRD)

Disclosure of CSR uses a dummy variable, with the condition that if the company carries out and discloses CSR activities in accordance with the items in the GRI Standards it will be given a value of 1, whereas if not, it will be given a value of 0. The CSR index is formulated as follows:

CSRDI_a =  

(Source: Haniffa and Cooke 2005)

CSRDI_a = Corporate Social Responsibility Disclosure Index for company a

n_a         = total item of disclosures according to the GRI Standards, n_a = 85 

Xi_a       = dummy variable, the sum of the disclosure scores of company a for year i (1 if disclosed, 0 if not disclosed)

Environmental Performance

Environmental performance in this study was measured using PROPER by the Ministry of Environment and Forestry. The PROPER rating system uses a rating system that is categorized into five colors, namely gold, green, blue, red and black. The gold color is given a score of 5 sequentially to black with a score of 1. 

Table 1. Determination of PROPER Value

(Source: Rakhiemah and Agustia 2009)

Financial Performance 

The financial performance used in this study is return on equity (ROE). ROE reflects the accounting rate of return on investment from shareholders or shows the company's ability to generate profits by utilizing its capital. The formula for calculating ROE is:

Return on Equity =  

(Source: Rosiliana et al. 2014)

Firm Size

This study uses firm size as a control variable. Firm size reflects the size of a company by looking at the total assets owned by the company.

Firm Size = Ln(Total Assets)

Descriptive Statistic

Table 2. Descriptive Statistic

Source: Author computation, 2020

Descriptive statistics are carried out to obtain an overview of a research data. The descriptive statistics used in this study are the minimum value, maximum value, mean and standard deviation of the research variables, namely environmental performance, CSR disclosure, financial performance proxied by ROE, and firm size as a control variable.

Classic Assumption Test

The researcher conducted a classic assumption test aimed to ensuring that linear regression can be said to be BLUE (Best Linear Unbiased Estimation). This test consists of normality test, multicollinearity test, autocorrelation test, and heteroscedasticity test. After doing these tests, it can be concluded that there were no problems in regression equation.

Hypothesis Testing

Table 3. Regression Result

Notes: * Significant at the 10% level

Source: Author computation, 2020

Table 3 shows the results of testing the research hypothesis. Based on the table above, it can be concluded that: (1) the CSR variable has a negative effect on financial performance; (2) the environmental performance variable has no effect on financial performance; and (3) firm size control variable is proven to have a positive effect on financial performance. Then, an adjusted R Square value of 9.3% is obtained which indicates that the independent variables, CSR and EP, can only explain the variation of ROE about 9.3% in the regression equation, while the rest is explained by other factors outside the regression equation. 

The Effect of Corporate Social Responsibility Disclosure on Financial Performance

Based on the hypothesis testing, the results show that CSR disclosure has a negative effect on financial performance. This result rejects the first hypothesis in this study. This negative result may be related to the company’s lack of ability to incorporate CSR into the company’s strategy, other than as a form of obligation that must be carried out. Companies need to strategically utilize CSR which it can be useful for creating and renewing competitive advantage. Effective and efficient use of CSR can create various opportunities in the development of its business strategy (Munilla and Miles 2005), such as bringing about new innovations or developing new products that are socially responsible in the consumer’s perspective (McWilliams and Siegel 2000), thus potentially increasing long-term profits. In addition, the positive results on the firm size as a control variable indicate that the relationship between CSR disclosure and financial performance is likely to be influenced by the size of a company. According to D’Amato and Falivena (2019), the relationship between CSR and the company’s financial performance is not effective for smaller companies due to the lack of available resources and the ability to manage these resources, including CSR. Conversely, companies with a larger size have the ability to manage larger and more adequate resources. Therefore, small companies may not gain benefit from implementing CSR as much as larger companies.

 

The Effect of Environmental Performance on Financial Performance

Based on the hypothesis testing, the results show that environmental performance, which is proxied by PROPER, has no effect on the financial performance of agroindustry companies. This result rejects the second hypothesis in this study. According to Vivianita and Nafasati (2018) this is because most companies in Indonesia still don’t care about the keeping the environment, especially in terms of managing the waste that is released, in accordance with the provisions and criteria in the PROPER assessment. This result is also supported by research data which shows that only a handful of companies receive gold or green ratings in PROPER. In addition, there are still many agroindustry companies that have not participated in PROPER, which only 9 from 21 agroindustry companies are participating in PROPER each year during 2014-2018. As with CSR, companies that don’t have a good strategic understanding tend to delay spending related to preventing environmental damage (Porter and Kramer 2006). Thus, this can lead to much larger expenses later when the company is deemed to have violated the provisions in PROPER. In addition, the factor of company size also needs to be considered in this test, the same as the effect of CSR disclosure on financial performance. 
 

Based on the previous analysis, it can be concluded that CSR disclosure has a negative effect on financial performance in agroindustry companies. This is due to the company’s lack of ability to strategically utilize CSR into its business strategy. Furthermore, different company sizes can also affect the effect of CSR disclosure on financial performance.

Environmental performance, which is proxied by PROPER, has no effect on the financial performance of agroindustry companies. This is because there are still many agroindustry companies in Indonesia that pay little attention to environmental balance, as indicated by the large number of blue and red ratings on PROPER. In addition, there are still many agroindustry companies that have not participating in PROPER, causing no influence between these two variables.

This study certainly has several limitations that might affect the test results, which is: (1) the assessment of CSR disclosure that is disclosed in companies’ annual reports tends to be subjective compared to companies that disclosed CSR activities in sustainability reports; (2) in the agroindustry sector, only 43% of the total population which are participating in PROPER, thus reducing the sample size and obtaining unfavorable results.

Based on the limitations above, the suggestions that can be given by researchers are: (1) future research is expected to be able to select companies that have provided sustainability reports based on the GRI Standards as research samples to reduce the subjectivity; (2) future research can use other sectors as a comparison between sectors; (3) future research is expected to carry out additional tests or robustness check to get stronger results.

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