The effects of environmental management system towards company financial performance in southern region of peninsular malaysia

Journal of Environmental Treatment Techniques

2019, Volume 7, Issue 4, Pages: 794-801

J. Environ. Treat. Tech.

ISSN: 2309-1185

Journal weblink: http://www.jett.dormaj.com

The Effects of Environmental Management System

towards Company Financial Performance in

Southern Region of Peninsular Malaysia

,2,3

1,3

M.F.M. Sam *, A.L. Shuqi

Faculty of Technology Management and Technopreneurship

Centre for Robotics and Industrial Automation (CeRIA), Fakulti Kejuruteraan Elektrik (FKE),

Universiti Teknikal Malaysia Melaka (UTeM)

Received: 03/08/2019

Accepted: 15/09/2019

Published: 16/09/2019

Abstract

Environmental concern and issues has been rising rapidly in the current industry. This has caused Malaysian firms now to put

their focus on environmental issue and green technology. However, besides on focusing on produce more green product, firms should

also focus on how to manage. Environmental Management System (EMS) is the suitable tool for an organization to manage their

environmental issues and improve environmental impacts. This study presents evidence of company’s performance which certified

with ISO 14001. Despite the resources needed for EMS is high, there are few benefits include improving firm's production

performance and reducing cost which will leads to enhance overall performance. Three companies certified with ISO 14001 were

interviewed to obtain the response and opinions on the effects of implementing EMS within their organizations. Results shown that

organization implemented EMS received many benefits and improvement. Although the cost of implementing EMS is high, the

research still obtain positive results from companies with EMS. Based on the results received, it can conclude that EMS is the tool for

organization to manage and overcome environmental issues and improve environmental performance. At the same time, companies

are able to improve their overall performance other than only environmental. It is hope that this study able to encourage more

Malaysia firms to implement EMS.

Keywords: Environmental Management System, Effects, Performance, Implementation

Although environmental awareness is increasing on product

Introduction

and services, management responsible behavior still low.

Government has taken action by enforcing rules and

regulations on environmental issues towards firms for their

environmental responsibilities and to overcome the arising

problems of environmental (52).

The most common pollution problem in the world right

now will be greenhouse effect where the earth’s temperature

is rising and causes global warming. This has resulted that

many consumers are aware of this problem and try to make a

change in their purchasing behavior as they have highly

influence and impacts on the environmental issues. Therefore

many firm has make environmental issue as a part of strategic

planning and management while producing their products

Environmental issue is one of the major problem in the

current world. Malaysia now faces a diverse range of

environmental issue. The environmental issues are becoming

more complex and challenging due to a few challenges such

as emerging of new kind of products, changing in

manufacturing process, regulations not updated, etc (Ahmad

Kamarulnajuib, 2013). Therefore, the level of environmental

concern has been growing in recent years. Firms and

manufacturer now also focus more on environmental issue.

Solving environmental issue has become a major aspect when

creating an innovation. Industry focus on producing

environmentally friendly products and service to the market.

(

Donnelly et al., 2006, Maas, Schulster and Hartman, 2014).

Corresponding author: M.F.M. Sam, (a) Faculty of

Technology Management and Technopreneurship, (b) Centre

for Robotics and Industrial Automation (CeRIA), Fakulti

Kejuruteraan Elektrik (FKE), (c) Universiti Teknikal

Organizations are starting to produce their product or services

with aspect of environmental friendly to prevent more

pollution occurs and worse. As stated by Graziela and Sergio,

the companies and environment hold an undeniable

Malaysia

Melaka

(UTeM).

E-mail:

mohd.fazli@utem.edu.my.

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Journal of Environmental Treatment Techniques

2019, Volume 7, Issue 4, Pages: 794-801

relationship as the operation and production of companies

can affect the environment in every way.

Environmental management system can be considered as

strategic management or sustainable management as its

purpose is to reduce environmental impacts and is a

continuous improvement. The system is usually used by firms

to monitor and control the environmental impacts that had

caused by business activities.

Lately, the awareness of how important to protect the

environment has increasing among the society and causes

business community to take environment issues seriously and

vital in business (8, 33, 48, 62). This has resulted firm eagers

to get recognition of these environmental demands by

changing their product or services lifecycle, decrease

production cost and reduce waste of production (2). Despite

Malaysia has make great efforts of attracting foreign investor

to come and invest on green industry, Malaysian consumers

still lacks of environmental responsible behavior practices.

Therefore, a study on how environmental management

system can help to solve the world problem and create

awareness is needed.

Literature Review

.1 Environmental Management System in Malaysia

By implementing environmental management system in

an organization indicates of owning a certification of

environmental management system standard known as ISO

4001. The standard is determined by the International

Organization for Standardization (ISO). The certification will

be granted to organization with environmental awareness

integrated into their management system with the purpose of

reducing environmental footprint. Certification International

Malaysia (11) has also stated that ISO 14001, the

international standard for EMS is to help organization reduce

their business’ environmental footprint and decrease

pollution and waste caused by the organization with

compliance to rules and regulations of environmental.

.1 Environmental Management System (EMS)

Environmental Management System (EMS) is a system

designed to help organization manage their environmental

impacts and improve environmental performance of their

products and services. EMS can be considered as

framework for managing organization substantial

environmental impacts. According Khanna and Anton (2002)

EMS can be expressed as a makeover of an organization and

motivation of making effort towards integrating

environmental management practices in production to reduce

pollution and continuous improvement. Environmental

management system (EMS) is a continuous improvement

way to organize, plan, making decision for all aspects of a

firm’s environmental performance and reducing negative

impact on environment (24). The system is a tool that can

help to manage current and also future environmental impact.

An EMS is said to be a continual cycle of planning,

implementing, reviewing and improving the processes and

action that support the organization to achieve its business

and environmental goals (Tonino, Gaetano, Fabrizio). An

EMS integrates environmental management into an

organization’s daily operation, long term planning and

quality management systems.

ISO 14001 according to European Certification Group

Malaysia (2017) is a worldwide acknowledged rules with

purpose of handling environmental issues and aspects related

to the organization and decrease their environmental impacts.

Environmental management system is adopted globally,

many countries government encourage firms to actively use

environmental management system (45). The role of ISO

4001 is to fulfil customer needs and regulations

requirements for environmental performance with continual

process improvement. According to Melnyk et al (2003),

EMS can be expressed as a guideline for an organization to

develop, manage and control environmental impacts by

reducing waste and compliance with regulations.

Implementation of EMS provides lots of benefits from

different aspect such as increase in productivity,

competitiveness, profitability and improved corporate image

(

59, 64).

EMS can be also expressed as a tool to enhance the

dedication of the organizations to comply with environmental

laws and to prevent the pollution. Environmental

management is a worthy investment for firms to commit for

reducing environmental impact, which may also affect firm

competitiveness, increase rate of productivity and efficient

use of energy. EMS is a set of processes and practices that

enable an organization to reduce its environmental impacts

and increase its operating efficiency (Tonino, Gaetano,

Fabrizio). Environmental management system affects an

organization’s competitiveness by increasing the firm

productivity with efficient use of resources and energy (35).

The implementation of EMS can be a source of

competitive advantage for manufacturing companies who aim

for international market. It is shown by Roy and Vezina

.2 Environmental Performance

Environmental management

system within

organization can affect significantly on the environmental

performance. According to Da Silva and de Medeiros (2004),

they have identify that environmental management assist the

company to improve environmental performance, reduce

cost, enhance corporate image with regulators and investors,

decrease pollution, save resources and penetrate new markets.

Hull and Rothenberg (2008) have stated that environmental

and business activities cannot be accomplished

simultaneously as there is relationship between them that

they will affect each other. Goh, Suhaiza and Nabsiah (2016)

have mentioned that implementing an ISO 14001 EMS will

help the firm to improve economic performance and at the

same moment enhance its environmental performance.

(2001) that environmental initiatives can be used to increase a

firm’s innovative capability. The aim of EMS is to help

organizations to reduce energy consumption, waste and the

use of ozone depleting substances and produce more

environmentally friendly products and improve its

environmental impact and prevention of pollution (14).

.2.1 Reduce Waste

ISO 14001 provides a framework and guides on how to

handle waste. With implementation of environmental

management system, environmental aspects such as waste

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2019, Volume 7, Issue 4, Pages: 794-801

will be identified and define on how to control and handle

waste. An organization with certified ISO 14001 will look

into and ensure their supply chain handle and manage their

waste efficiently (32). According to the requirements in ISO

al (2005) supported the relationship between environmental

performance and financial performance due to findings of

pollution reduction will lead to future cost savings by

increase efficiency, reduce costs and decrease future

liabilities. ISO 14001 considered to be the most popular

environmental management system, there is an undeniable

relationship between ISO 14001 adoption and financial

performance. Thus, this have caused many companies in

Malaysia are motivated to implement such standard (46). ISO

14001 certification is able to affect positively on financial

performance of organizations. The results of Hrafnsdottir

(2011) studies shown that organizations with environmental

management system or environmental certification ISO

14001 had positive financial performance.

4001, companies will need to categorize their waste in

hazardous or not and determine the ways to handle it

compliance with legislation. Companies with certified ISO

4001 can use waste reduction policies, goals, training and

reporting to meet ISO 14001 requirements (EPA, 2016). With

the right support from environmental management system, an

effective waste management strategy can be applied that will

repay the investment (61).

.2.2 Reduce Environmental Impacts and Pollution

Every product or service has an impact on the

environment during all stages of its lifecycle (31). Activities

during businesses occupy the main cause for environmental

impacts. These aspect need to be considered and focus into

their management and product or services. Thomas (2014)

supported that environmental management system adoption

has positive effects on energy use and waste production.

Thus, with environmental management system, organizations

are able to participate and make an effort on reducing

environmental impacts.Based on ISO (2015) report, ISO

2.3.1 Increase Profit

ISO 14001 decreases environmental related costs thus

increase organization profits as well as opening up more

business opportunities. In the early years, increase

profitability was the main factor for organizations to

implement environmental management system (19). Based on

El-Zeind (2012), he reviewed that organizations with ISO

14001 certification can experience increase in profit due to

reduction in expenses. Studies by Renato, Bruno, Valcemiro

and Aridelmo (2012) have shown that organizations that

implemented environmental management system get higher

net income than those without EMS. Thus, this indicates that

organizations that implement environmental management

system tend to increase their economic-financial results.

Furthermore, the study from Hibiki and Arimura (2016) also

revealed that ISO 14001 raised the market value of

organization by reducing environmental impact and therefore

the risk of liability caused by environmental pollution will

lead to an increase in organization’s profit on a long-term

basis.

4001 has help to reduce environmental impacts significantly

on cutting down carbon emissions, dust production and

recycle on water. Environmental management structure

motivates firms to prevent pollution by replacing inputs and

make changes on processes (45). Activities that are carried

out with the implementation of environmental management

system are mainly focused on reducing the environmental

loads such as reduce energy use, waste creation and release of

chemical (39).

.2.3 Efficient Use of Resources

Scarce resources has become a severe problem and

organizations should now pay great attention of this aspect

into their supply chains and production (53). World global

resources is depleting over the period, scarce valuable

resources caused conflicts in the market, all these

environmental issues are resulted from the non-sustainable

use of resources by man-generated activities (Marios

Mavroyiannos). According to Croner’s article (2014),

environmental management system will ensure management

to take note that there is sufficient resource are available to

carry out their business activities. ISO 14001 as an

international standard helps organizations to improve their

environmental performance through more efficient use of

resources (37). An environmental management system can

assist a business in maximize efficient use of resources as it

requires organizations to examine their practices and

determine how their resources can be best managed (44). It is

suggested by Stephen and Ilona (2006) that resources can be

allocated more efficiently and effectively with the

implementation of environmental management system.

2.3.2 Reduce Cost

Cost can be reduced with environmental management

system because implementation of EMS can lead operations

and management performed effectively and efficiently (Lillah

and Struwig, 2016). Environmental management system as a

systematic approach to meet business goals with

environmental aspect contributes in the benefits of reduced

costs (22). Environmental management system helps

organization to use their energy and resource efficiently and

effectively can helps to reduce cost as they are related to each

other. Energy efficiency and costs are closely related to

operating cost which lead to financial performance of

organization will be affected by their environmental approach

(13). Moreover, Organizations with implementation of

environmental management system will also have better

design and environmental friendly of operational processes

for example installing energy-efficient lighting systems (49).

2.3.3 Increase Firm Assets

Environmental management system is reported to have an

ability to increase the value of asset in an organization. The

results of Li and Wu studies (2017) have shown that the

adoption of environmental management system brings

increase in total asset. The requirements of environmental

.3 Financial Performance

Nakao et al. (2007) studied the relationship between

environmental performance and financial performance with

calculation method of financial variables. Rowland-Hones et

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2019, Volume 7, Issue 4, Pages: 794-801

management system will push organizations to increase

investment in their manufacturing process and enhance their

techniques thus this leads to higher total assets. According to

Wu and Zhou (2011), an organization which invested in

environmentally assets compliance with environmental

regulations can maximize in utilization of the assets that

improve the environment with their operating activities.

Moreover, Lee, Noh, Choi and Rha study (2014) shown that

the implementation of ISO 14001 increased a firm’s total

assets, liabilities and ratio in long run. Besides increasing a

firm’s asset, ISO 14001 also protects the company, assets,

shareholders and directors (10).

thinking and understanding on the importance of

environmental issues by all within the organization. TÜV

Rheinland (2017) also stated that the main of environmental

responsibility is to raise awareness for environmental issues

among your staff to minimize environmental impacts. With

the knowledge of knowing environmental management

system, employees are able to function and carried out task

given with different environmental responsibilities in new

position (32).

2.4.3 Competitive Advantage Can Be Sustained

Competitive advantage is what makes an organization

better and differentiate from competitors in customers’ minds

(4). According to QMI SaiGlobal (2009), organizations are

able to gain competitive advantage through environmental

management system by presenting their environmental

commitment to customers who are greater concern to

environmental performance of their suppliers. Competitive

advantage can be gained by interaction with stakeholders on

environmental responsible compliance with legal and

regulations and can affect positively on financial results (25).

Environmental management system standards help

organization to innovate more products, enhance

management system process, compliance with rules and

regulations and improve firm reputation among investors,

customers and public (9). Environmental variable integrated

into innovation of products or services can be the source of

competitive advantage (41).

.4 Corporate Performance

Pan (2003), Sambasivian and Ng (2008) have find out

that benefits of environmental management system can be

categorize into enhance corporate image and reputation,

motivate employees, profitability, performance, opportunity

and customer dedication to the company. Corporate social

responsibility awareness is increasing rapidly and has become

one of the most important concept in business strategy (40).

As suggested by Quairel and Capron (2010), public not only

focus on organization economic performance but also

concern about their responsible towards individuals, the

society and the natural environment. Organization is aslo able

to build a solid foundation of relationship with their supply

chain parties and community (50).

.4.1 Increase Firm Image and Value

A good image of corporate image can increase the value

2.5 Conceptual Framework

of organization. It can determine the amount of suppliers

willing to partner with desired organizations and customers

that are willing to purchase the products or services. With a

certification of ISO 14001, the organization is able to boost

their image and value (Anne et al., 2006). ISO 14001 is able

to enhance an organization’s reputation by presenting

commitment to best practice. With the certification of ISO

Environmental management system can affect a company

performance from different aspect such as environmental,

financial, and corporate. The relationship between

implementation of environment management system and

company performance is expressed in

framework as shown in figure:

a conceptual

4001, it indicates that the organization is qualified for

recognition and will increase it creditability among suppliers.

One of the main drivers for certification ISO 14001 is to

enhance firm’s reputation (21). According to Rossignol

(

2017), environmental management system is able to improve

Figure1: Conceptual Framework

an organization’s image with public, regulators, lenders and

investors. ISO 14001 certifications is able to improve

company reputation and confidence of stakeholders through

strategic communication about the implementation of

environmental management system.

Methodology

.1 Location of Research

Johor and Melaka are states of Malaysia located in the

Southern Region of Peninsular Malaysia. Johor is considered

to be the second developed state in Malaysia after Kuala

Lumpur. As it is located next to Singapore, many cargos and

export activities are done in Johor. While Melaka is known as

the historic state as there are many historic buildings remain

in Melaka. Despite that, the manufacturing industry in

Melaka is growing rapidly. There are many international

firms are investing in Melaka and Johor. Manufacturing firms

are starting to build plants and basing their production line in

Melaka and Johor. Johor will be a strategic location for firms

which invest in exporting their products to other countries as

Johor own ports. The Star Online (Mar 7, 2017) has reported

that a local public-listed manufacturing firm has decided to

.4.2 Create Awareness and Responsibility among

Employees and Suppliers

Regarding to ISO 14001 standard (30) organizations hold

a responsibility to make sure employees involved in activities

that cause environmental impact have received proper

education and training. With environmental management

system framework on environmental aspects, employees are

able to fulfil the expectations of their top management and

stakeholders by presenting their commitment and

responsibilities to the environment (23). Based on Neville

Clarke Organization official website (2015), ISO 14001

Environmental Management System is able to enhance the

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2019, Volume 7, Issue 4, Pages: 794-801

pour in RM500mil worth of investments in Johor. Besides

that, in 14 Oct 2017 The Star Online once published an

article of Johor poised to become preferred investment hub.

In order to become the new regional economic power house.

On the other hand, based on an article of Bernama (May 8,

Recommendations

.1 Conclusion

The research is to study the effects of environmental

management system towards company performance in

Southern region of Peninsular Malaysia. It was shown in

many studies indicate that firms certified with ISO 14001

also means implemented environmental management system

can bring variety of benefits for an instance increased market

share, benefits for stakeholders, reduce risks, reduce costs

and increased productivity.

017), Melaka has received more than RM20 investments of

projects by global firms in the past four years. Melaka got

offers from various industries that are interesting to invest in

Melaka. The Star Online (Aug 9, 2017) has reported that

Melaka has become the attractiveness of the Malaysia as a

competitive location for firms to emerge into Asean. There

are many well-known firms in Melaka such as Texas,

Infineon, Mamee, SunPower and etc. For an instance,

Infineon has decided to further expand their firm in Melaka

by investing a RM240 million facility. In 2015, Melaka has

also received an investment of RM 35.7 billion and 791

projects in the manufacturing sector since 1980. Besides that,

Melaka state government also making effort to attract more

international investments to the state. There are a few foreign

companies invested in Melaka and Johor are large scales.

This indicates that there will be more activities carried out

and environmental issues in Johor and Melaka will be

increasing as there are more production line.

Open

Code

Properties

Respondents’ Words

1. ―It can improve our

financial performance and help

us saved a lot of money‖

(Krishnan)

2. ―…and this filter detergent

normal dish washer is very

cheap‖ (Baha)

Saved a lot of

money

Cheap

. ―…also the purchase of dish

Save more than

twenty thousand per 4. ―We were able to save more

month

washer very cheap‖ (Krishnan)

than twenty thousand per

month‖ (Krishnan)

Cost is reduced

5. ―Our cost is reduced lots

and trend also dropping‖

.2 Sample

The study will be undertaken as qualitative research. It

Reduce

Cost

Trend also dropping (Baha)

consists of one-to-one interviews with three companies

involving professionals or expertise in the field of

environmental management system. The results and opinions

collected are from companies certified with ISO 14001 and

employees with manager level or person who is in charge of

ISO 14001 is interviewed. The data from the interviews will

be counted as a result for the interviewer as an approach to

the research. Interviewees job position in their respective

company need to be associated with environmental

management system. The field of questions to be conducted

in the interview will cover the research objectives regarding

the effect of environmental management system towards the

company based on the aspect of waste, recycling and design

practices. Qualitative research in the role of theory means

inductive that generates theory, while in terms of ontological

orientation qualitative is considered constructionism (34).

. ―…we saved lots of money

Saved nearly 200K

per month

with this method. We have

saved nearly 200K per month

since this implementation‖

(Baha)

Cost reduction

. ―It is more towards

Cost of

manufacturing

reduced

contribution towards cost

reduction‖ (Baha)

8. ―Therefore, when we are

able to save lots of energy also

indicate cost of manufacturing

is reduced‖ (Baha)

Table 1: Results of statistical testing

Positive Σ Negative Σ Remarks

P/E Ratio

Positive, not rejected

ROE

ROA

Positive, not rejected

Data Analysis

Profit Margin

Negative,

rejected

not

.1 Discussion

Research Objectives: To identify the effects of

Operating Margin 17

ROSF 25

Positive, not rejected

implementing EMS towards company financial performance.

Three firms, covering a range of industries, were compared

using the Wilcoxon signed-rank test at a 96 percent

confidence level with a critical value of 10. The results are

summarized in Table I and clearly show that none of the

tested criteria is below the critical value. Therefore, this

hypothesis could not be rejected for any of the financial

indicators. This result shows that the market does not

concentrate the costs of EMS execution significant. Based on

this explanation, it can be summarized that the results of the

financial analysis show that the cost of reducing

The research has shown that there are direct and indirect

financial benefits can be obtained with the implementation of

ISO 14001 at all levels of an organization. Based on the

results, it is shown that through the implementation of

environmental management system, it significantly affected

costs of firms by reducing environmental impacts by their

activities. It is shown in a study that implementation of EMS

also can gain competitive advantage which will be reflected

in positive financial results (18).

environmental effect does not significantly weaken

company’s profitability.

Based on respondent’s response on the question

regarding financial performance, both three respondent gave

positive answer of implementing environmental management

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2019, Volume 7, Issue 4, Pages: 794-801

system in their organization is able to reduce cost through

reducing waste, increase profit by reduce raw material.

Although certification of ISO 14001 may cost them high but

they are able to save more such as Konica Minolta had saved

more than twenty thousand per month. Respondent from

Hitachi Chemical also mentioned that they are able to save up

to 200K per month by carry out the activities with

implementation of ISO 14001. However, there is different

perspective from Mr Jerald from Teck Wah Paper Products.

He mentioned that the cost to implemented environmental

management system is high because there are many fees to

pay and follow up.

collected and analyzed fulfill the research question and

objectives of this research. Responses have provided answer

and opinions that match three research objectives with the

themes of financial performance, environmental performance

and corporate performance. Therefore, this research is

considered to be success as desired outcome achieved and

targeted objectives are fulfilled. However, there are some

limitations of this research such as time and location studied.

This research only covers the Southern Region of Peninsular

Malaysia, Johor and Melaka. It is due to time constraint and

only few companies are managed to interview. Thus, it is

hope that this research can be further studied by expanding

the research location and time allocated for research.

Besides

than

affecting

financial

performance,

implementation of environmental management system also

has great impact on environmental performance. The effects

on environmental performance is the second research

objective of this study. According to ISO (2014) survey

results, the most critical issues that required more care were

decreasing and controlling pollution, plan strategies for

efficient use of resources and reducing waste and pollution.

With ISO 14001, firms are able to find out and evaluate the

environmental aspects associated to the life cycle of products

and services to come out with a plan for solving the

environmental issues.

Due to the arising environmental issues and impacts of

manufacturing activities, every firms play an important role

and hold responsibility in helping to solve the problem and

make an effort to resolve it. Firms interviewed in this studies

has took action on their corporate social responsibility on

environmental. For an instance, Konica Minolta focused on

reducing their waste. They have set a target of zero waste and

Acknowledgement

This study supported by Universiti Teknikal Malaysia

Melaka (UTeM), Ministry of Higher Education (MOHE),

Malaysia. All errors and omissions are the responsibility of

the authors.

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Abbreviation

801