Background of the Study

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CHAPTER I INTRODUCTION

A. Background of the Study

To produce goods ready for consumption, the company needs materials and other supporting factors, such as raw materials, auxiliary materials, equipment and labor. The company is a technical entity that aims to produce goods or services. The company is also called the venue for the production process that combines factors of production to produce goods and services. Nowadays, there are still many companies who just think about themselves, how they get profit, and how they survive in the market. But what about their environment? As we can see now, usually the environment of companies in Jakarta are already polluted by the waste of the companies. They throw their waste anywhere like in rivers and subsequently the sea. Their waste causes diseases which harm the lives around the firms. The idea that a firm‘s environmental ―green‖ performance and overall economic performance are positively related Murphy 2002 has not always received universal acceptance within the research community. In the conventional such activities represent costs to the firm which should be minimized whenever possible. Specifically, in investors view pollution control expenditures as a drain on resources that could have been invested profitably, and do not reward the companies for socially responsi ble behavior‖ Mahapatra 1984. 2 In their theoretical perspectives, previous authors have argued that if the firm makes ―greener‖ i.e., more efficient use of its resources it will be more economically effective. Su ch ―greener‖ use can come from for example generating less pollution and waste from the resources employed or by using fewer resources. While there have been some dissenting voices along the way Chen and Metcalf 1980; Mahapatra 1984, when researchers find a positive relationship between environmental and economic performance, they generally credit it to such improved resource utilization which in turn leads to overall increases in organizational effectiveness. Some authors assume that environmental protection mainly causes costs to a company whereas others believe that environmental protection generally pays off and thus improves the firm‘s bottom line Cohen et al., 1995. The relationship between environment and economic performance may differ in depending on the regulatory regime in a country, the cultural setting, customer behavior, the type of industries or size of companies analyzed, the time span, etc Schaltegger and Synnestvedt, 2002. 3 Table 1.1 Some real cases of company wastes No Name of Company Type of Activity Elements Pollutants Location of Pollution 1 PT Sawit Sejahtera Nabati SSN Palm Oil Liquid Waste Batu-Batu river Aceh 2 PT Nagamas Mulya Palm Oil Liquid Waste Citalas river Riau 3 PT. Surabaya Agung Kertas Pulp and Paper Liquid Waste Surabaya river 4 PT Bintang Tri Putratex, PT Kesmatex, CV Ezritex Tekstil dan Batik Liquid Waste Banger Pekalongan river 5 PT Bintang Raya PT. Maya Muncar PT. Fisindo Kusuma Sejahtera PT. Indosari Laut Canning and fish meal Canning and fish meal fish meal fish meal Liquid Waste Muncar river Banyuwangi 6 PT. Tonikotex Textiles Liquid Waste Tangerang river 7 PT. DKB, PT Daya Radar Utama, PT. Bayu Bahari, PT. Wayata Kencana Shipyard Industry Solid wastesand blasting Tanjung Priok Sea 8 PT. Jace Oktavia Mandiri waste treatment Ferrosand waste steel slag Batu Aji Batam Source: www.indowarta.co The table above shows some cases that happened in different areas in Indonesia. These are done by several companies and has different wastes that harm the lives of the surroundings. The companies are responsible for the environmental problems that they encounter caused by themselves. 4 Most research on the environmental-economic performance relationship has been predicated on the idea that internal strategic environmental investments result in improved resource efficiency Bansal and Roth, 2000; Branzei et al., 2004; Buysse and Verbeke, 2003. While the effects of such strategic choices are often clear e ven to the financial markets, internal financing is not the only phenomena that drive organizational performance. Institutional and other external factors also have a profound effect on the performance survival of firms Singh, Tucker, and House, 1986. Institutional and other external factors also have a profound effect on the performance survival of firms Singh, Tucker and House 1986. While several researchers have examined how the stock market reacts to improved environmental performance through market returns Dowell et al. 2000; Gottsman and Kessler 1998; Mahapatra 1984; Nina Febriana 2012 little attention has been paid to such external influences on the environmental-economic performance relationship itself. There are also researches which are in contrast. Christmann 2000 finds out that an environment profile of a firm could lead to a heavy cost incurred by the company. Stephanus 2012 proved that there is no influence of the corporate social responsibility to the cost of equity. From the results of the researches tells us that there is a gap that appear regarding the topic of environment and economic performance of the company. Based on this background, the title of the study is “ The Relationship Between Environmental Risk Management and Cost of Capital”. 5

B. Problem Definition