The Relational of Environmental Risks, Opportunity

and Performance: The Impact of Scope3 Emission

Yi-Chun Kuo Yuan-Han Jiang
Chung Yuan Christian University Chung Yuan Christian University
ChungLi, Chinese Taipei ChungLi, Chinese Taipei
Kuoyichun99@gmail.com w147555@gmail.com

Abstract- Climate change has become the one of the most whole supply chain to identify the major carbon emission point
important environmental issues in recent years, by which, and environmental risk, and thus enhance the company's
carbon-related disclosures is a main concern. Corporate Value environmental performance and financial performance.
Chain (Scope3) Accounting and Reporting (WRI & WBCSD, Keywords-Scope 3, Environmental risk, environmental
2011) offers a consistent measurement standard of global performance, financial performance
greenhouse gas emissions. The standard specified that greenhouse
I. INTRODUCTION
gas (GHG) does not only include all direct emissions related to
Climate change has become the one of the most important
enterprises or products in Scope 1, but also includes the indirect
environmental issues in recent years, by which, carbon-related
emissions related to energy production by purchasing electricity,
disclosures is a main concern. In enterprise operating activities,
heat, and steam in Scope 2 and other indirect emissions in Scope 3.
procurement, manufacturing and logistics are the major sources
That means whether the emission is direct or indirect, all carbon
of carbon emissions [1]. Since the early 1990s environmental
emissions in the whole supply chain should be estimated
regulations and consumer pressures have encouraged many
appropriately and disclosed in the environmental report of core
companies to add the environmental component to supply chain
enterprises. According to the scope 3 measurement standards, the
management. Government regulations and legislation are often
carbon emission of suppliers should be accounted and included in
referred to as one of the most important reasons for
the environmental report of core enterprise. The risk of
organizations to take environmental action [19]. In developed
regulation, litigation, reputation, logistics and competitiveness
countries the stakeholders of firms, such as governments,
might arise among supply chain partners whose different
non-governmental organizations, local communities,
environmental awareness might not match the core enterprise’s
stockholders, investors, trading partners, employees, financial
environmental strategy.
agencies, and consumers, put stress and expectation that they
This study is to explore the environmental risks the core
are conscious of corporate environmental management [12]. To
enterprise will encounter while adopting the scope 3 of the carbon
respond to the expectation of the environmental protection of
assessment standard by including the emission through the value
academics, regulations and consumers, many enterprises begin
chain. In addition, the opportunities and threats of environmental
to control the greenhouse gas moderately.
risks will also be investigated to find out their relationship with
In order to help environmental groups and academics
company's environmental performance and financial
evaluate the carbon emission, relevant organizations actively
performance. We hope to enable the enterprises to re-examine the
____________________________________
develop the assessment criteria and standards of the product’s
978-1-4673-5570-4 /13/$31.00 ©2013 IEEE



carbon footprint. Corporate Value Chain (Scope3) Accounting emissions is becoming important [7]. Each country's
and Reporting (CCAR) (WRI & WBCSD, 2011) offers a greenhouse gas emission standards are different and enterprises
consistent measurement standard of global greenhouse gas will face some of the environmental risks (Different greenhouse
emissions. The implementation of the value chain accounting is gas emission standards of each country will bring some
includes the core businesses, suppliers, distributors, service environmental risks to enterprises): 
providers and customers. The standard specified that a) Regulatory risk: each country is inconsistent has a
greenhouse gas (GHG) does not only include all direct different requirement for greenhouse gas emissions.
emissions related to enterprises or products in Scope 1, but also b) Litigation risks: product in violation of foreign
includes the indirect emissions related to energy production by environmental laws and regulations and which
purchasing electricity, heat, and steam in Scope 2 and other caused litigation issues.
indirect emissions in Scope 3. That means whether the emission c) Substantial risk: serious natural disasters destroy
is direct or indirect, all carbon emissions in the whole supply the factory or stagnate production line.
chain should be estimated appropriately and disclosed in the d) Reputational risk: poor environmental reporting
environmental report of core enterprises. According to the results greatly affected the reputation of the
scope 3 measurement standards, the carbon emission of company.
suppliers should be accounted and included in the e) Competitive risks: competitors’ better performance
environmental report of core enterprise. on carbon emissions will pose a threat to the
The quality of the supplier greatly affected the company.
implementation of the Corporate Value Chain Accounting and f) Logistics risk: A change of original transportation
Reporting Standards [2]. Since the implementation of mode must be made under reducing carbon
environmental protection strategies need a lot of costs, emissions requirements.
suppliers which are lack of capital are more difficult to fit and
B. Environmental performance
perform. The risk of regulation, litigation, reputation, logistics
Enterprises conducting operations to reduce the harm
and competitiveness would arise among supply chain partners
arising from the environment, such as reducing emissions of
whose different environmental awareness might not match the
greenhouse gases, reducing the generation of waste and
core enterprise’s environmental strategy.
conservation of energy use, is regarded as the environmental
This paper is to explore the relationship between the
performance [16]. Adopting the value chain accounting and
environmental risk, the environmental performance and
reporting standards will incorporate the direct and indirect
financial performance of a company, due to the implementation
carbon emissions in the supply chain. It may cause some
of the accounting of the value chain for the environmental
environmental risks, and opportunities for enterprises to take
improvement strategy. Hope to enable enterprises to re-examine
initiative to find the biggest reasons of environmental impact in
the entire supply chain to identify and improve the part of a
supply chain. Yates et al. (1992) proposed that Risk
significant impact on the environment, and thus enhance the
management must take the initiative, forced to perform risk
company's environmental performance and financial
management effect is relatively poor [10]. The enterprises adopt
performance.
a proactive corporate environmental improvement strategies
II. LITERATURE REVIEW can not only improve the efficiency of energy use, reduce

A. Environmental risks pollutant emissions, reduce energy costs, water charges and
expenses, and further can enhance the competitive advantage,
Wellington et al. (2004) pointed out that due to global
improve corporate image and develop new market
warming and climate change, the issues of greenhouse gas


opportunities. on the financial performance.
Thus, the following hypotheses are proposed: In Reviewing of the literatures, when enterprises reduce
H1: The environmental risks have significant impact on the environmental risks, the good performance of environmental
environmental performance. performance can improved financial performance. It reveals an
in directive relationship between environmental risks and
C. Financial performance
financial performance. In this paper we wonder there may exit
Financial performance means enterprise reach economic
direct relationship between environmental risk and financial
goals, such as sales growth, profitability, earnings per share
performance.
. The implementation of the corporate accounting and
Therefore, we proposed the following hypotheses:
reporting standards adopted value chain and improve the
H3: The environmental risks have significant impact on the
environment for the measures, leaving the company
financial performance.
environmental policy enforcement lies to create a profit
successfully in the future. In recent years, many studies have III. METHODOLOGY
referred to the impact of environmental performance to
A. Data and Questionnaire
financial performance. Bragdon and Marlin [11] pointed out
We design a questionnaire for empirical study, which
that enterprises having better environmental performance will
inclusion four sections: (1) the motivation for implementing the
improve operating profit. Berry and Rondinelli [15] said that
corporate value chain accounting and reporting, (2) the
the implementation of environmental policy, allows cost
environmental risks raised by implementing the corporate value
reduction, improve material efficiency, and reduce waste
chain accounting and reporting, (3) the environmental
disposal costs. Deegan environment report shows that better
performances, and (4) the financial performances. Our
environmental performance is conducive to financial
questionnaires are sent to the members of Business Council for
performance [4]. Klassen and McLaughlin conducted the model
Sustainable Development and Taiwan corporate sustainable
and proved the empirical results that environmental
forum. They are membership of the World Business Council for
performance has a positive effect on firm performance [21].
sustainable development, and they may implement the carbon
However, there 7uis also a literature indicated that
footprint of corporate value chain accounting and reporting.
environmental performance will have a negative impact on the
The council above consists of different industries such as
financial performance. Walley and Whitehead in 1994, to think
photoelectric, chemistry, communication, and financial etc.
businesses invest friendly for environmentally related operating
costs, leading to detract from the development of the enterprise B. Structural equation model

itself, but also improve its environmental performance, think

investment in environmental movement will increase operating
costs, while improving environmental performance, it can lead
to detract from the development of the enterprise and lower its ࢢ2 ࢢ1
economic performance [18]. Many researchers also found no
significant association of corporate environmental performance
and economic performance measure (shareholders' rate of
return). Based on the above literature, environmental
performance has a positive influence to financial performance.
ȕ1
Thus, the following hypotheses are proposed:
H2: The environmental performances have significant impact Figure 1.Structural Equation Modeling Model


 Structural equation model (SEM) is a regression-based  (5)
multivariate analysis; its main purpose is to explore the causal
Where ȕ1 is the effect of endogenous constructed on each of the
relationship between the variables. SEM included two variables: other endogenous constructs (matrix); ȗ2 is the errors in
equations or residuals.
the latent variables and observed variables, latent variables are
usually indirectly measured by the observed variables. The IV. CONCLUSION

researchers pointed that most econometric made law, SEM can  Due to the impact of climate change, under the pressure
consider the presence of multiple potential variables, and to of environmental regulations and stakeholders, businesses
assess their reliability and validity [6]. It can handle a large began to expose carbon footprint. We’d like to explore the
number of endogenous and exogenous variables, as well as possible environmental risks and opportunities created by
latent (unobserved) variables specified as linear combinations implementing environmental improvement strategy and the
(weighted averages) of the observed variables. SEM contains impact on company performance. After analyzing currently
two modes: measurement mode and structure mode. collected questionnaires, we learned that motivations of Taiwan
Measurement mode is to exam the relationship between latent enterprises to use the Carbon Disclosure are foreign regulatory
variables and observed variables and from the results can be requirements, resolving litigation issues, and customer
observed the variable reliability and validity [13]. It can be requirements. Enterprise recognizes that the environmental
divided into the relationship between the potential depend risks they attention mainly for regulatory risk, litigation risk
variable with the observed depend variable, such as the and competitive risk. In terms of environmental performance,
equation (1): the companies will reduce greenhouse gas emissions, and
(1) reduced energy and water use. In financial performance,
Where Y is the depend variable of observed variables, is corporate will reduce fines expenses, litigation expenses,
the Potential depend variable of observed variables related enhance corporate image and enhance their competitiveness.
coefficient matrix, and is Y variables of the error term. Some companies believe that the implementation of the Carbon
And the relationship between potential independent variables Disclosure does not have much direct impact on the
and observe independent variables, such as the equation (2): environmental performance and financial performance.
(2) According to the information, we found that the enterprise with
Where X is independent variable of observed variables, is implementation of Value Chain Accounting and Reporting
the Potential independent variable of observed variables related Standards, although the environmental risk to the company's
coefficient matrix, and is X variables of the error term. performance presented poor. However, after the effective
The structure mode is to exam the causal relationship control of risks, can indeed improve the enterprise of the
between the latent variables, and can estimate the cumulative environmental performance, and improve financial performance.
variance and explained variance. Every point of the supply chain carbon emissions due to the
The figure 1. is our structural equation modeling. The equation calculation of enterprise value chain accounting standards are
is as follows: listed in detail, to corporate decision makers can be very

(3) detailed view every day the total amount of carbon emissions.

Where Ȗ1 is the effect of exogenous constructed on endogenous Reducing the risks and threats to enterprise solutions, energy

constructs (matrix); ȗ1 is the errors in equations or residuals. efficient use of waste products and reduce the environmental
threat, the company's environmental performance is definitely a
              
positive response. Environmental performance better
Where Ȗ2 is the effect of exogenous constructed on endogenous
constructs (matrix); ȗ2 is the errors in equations or residuals. presentation, consumers love to use the company's products,
increased willingness of investors to invest, and therefore


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