Environmental Performance and Corporate Governance: Evidence from Japan

Abstract

This study investigates the impact of corporate governance on corporate environmental performance among Japanese companies listed on the Tokyo Stock Exchange for the period 2006–2019. Using fixed-effects modelling for 4617 firm-year observations from 2006–2019, we demonstrate that board independence, board diversity, and the presence of environmental management committees are significantly associated with improved environmental performance. However, a large board reduces the environmental performance, and CEO duality does not appear to be a significant factor affecting a firm’s environmental performance. Additionally, we show a consistent result when we proxy environmental performance by total carbon emissions.

1. Introduction

In today’s heightened climate change debate, firms are under enormous pressure to engage with relevant stakeholders to limit carbon emissions [1,2]. Among corporations, there is increasing pressure to become greener and to reduce their negative environmental impact [3,4]. With a surge in the general stakeholder awareness regarding the environmental performance of firms and the associated risks of non-ecofriendly corporate decisions, firms are facing mounting pressure from stakeholders to carefully assess the risks and consequences of environmental decisions and raise their level of responsibility towards the environment [5]. The environmental practices of organizations have become a crucial issue in society, with a wide range of stakeholders expecting environmental transparency [6,7]. To improve their environmental performance, corporations need to take the necessary steps toward a good corporate governance system, which could significantly help to address this global challenge. A company’s board of directors has the potential to enhance an organization’s environmental performance, as it is at the center of all significant decisions made by the company [8]. In this study, we consider the importance of several board attributes in relation to environmental performance, aiming to investigate the impact of corporate governance attributes on corporate environmental performance in the context of Japan.

The relationship between corporate governance attributes and environmental performance can be described from both agency theory and resource dependence theory. According to agency theory, information asymmetry between the agent and the principal can be mitigated through a good corporate governance mechanism. For example, a board with more independent directors is deemed to have a better capacity to balance the firm’s financial and non-financial goals arising during complex environmental decision-making [9,10]. Similarly, a more diverse board structure, such as the inclusion of female directors on the board, has been shown to enhance the awareness of, and attention to, social and environmental issues related to the firm [11]. According to resource dependence theory, the board of directors plays a significant role in enabling a firm’s external dependency and resource acquisition ability. A corporate board has the ability to guide or facilitate the management to use resources efficiently, which can help them to gain legitimacy from the relevant stakeholders. Thus, the board’s characteristics are expected to have an important influence on the environmental performance of a firm. Much of the extant literature focuses on the impact of board attributes on environmental disclosures [12,13,14], policy adoption, and carbon emissions disclosures [15,16]. In addition, some studies have investigated the association between selected corporate governance attributes and carbon emissions-related disclosures [17,18,19]. However, most studies [17,19,20,21,22] are set in the context of developed countries such as the U.S.A, the U.K., Australia, and Canada with a small number concentrating on developing countries [9,23,24]. To the best of our knowledge, there is no study that has investigated the impact of board attributes on corporate environmental performance in the context of Japan; hence, our study aims to advance the relevant knowledge in this area by addressing this.

We conducted this study in the context of Japan for several reasons. First, Japanese corporations have become more environmentally conscious over the last few decades [25,26]. Japan has particularly high levels of corporate environmental reporting requirements [27,28,29], and significant regulatory changes may have an impact on environmental performance. Second, industrial units in Japan are not only in the process of implementing environmental management practices, but also in the process of adjusting to corporate environmental issues [29]. Third, Japan is known for its advanced technological development and stringent corporate environmental regulations [30]. For example, Japan made greenhouse gas (GHG) accounting and reporting mandatory in 2006. Since 2004, regulations regarding business activities with environmental considerations have been focused on ensuring the reliability of the environmental reporting framework for firms [28]. Fourth, environmental management systems are expected to help firms significantly reduce their environmental impacts, despite this being entirely voluntary in Japan. It is, therefore, a promising option to evaluate the factors influencing corporate environmental performance using the Japanese database. Finally, Japan is deemed to be a stakeholder-dominated board, which does not mandate the appointment of independent directors on the board [31]. However, following the corporate governance reforms in 2006 and the subsequent introduction of the corporate governance code in 2015, there has been an increase in the appointments of independent directors within boards (from 64.4% in 2014 to 95.8% in 2016, JPX, 2017, https://www.jpx.co.jp/english/equities/listing/ind-executive/01.html (accessed on 22 October 2022)). Similarly, there has been a significant change in ownership structure in Japan over the last 20 years. Considering the aforementioned points, the study of whether these changes in corporate governance characteristics have had a significant impact on corporate environmental performance in Japan provides a valuable research contribution.

Using the firm fixed-effect, this paper aims to investigate whether various corporate governance attributes posit any impact on the environmental performance of the Japanese firms. A sample of 428 Japanese companies listed on the Tokyo Stock Exchange from 2006 to 2019 provided evidence that a well-diversified board, and a board consisting of more independent directors, significantly reduces a firm’s carbon emissions. In addition, we show evidence that firms that have a separate environmental management committee tend to be more inclined towards improving their environmental performance. However, we report two outcomes which were contrary to our expectations. We show that a larger board does not necessarily improve a firm’s environmental performance. Furthermore, we report a nonsignificant relationship between CEO duality and environmental performance measures. The present study contributes to the broader literature on corporate governance and environmental performance. First, we provide insight into the impact of various corporate governance attributes on the carbon emissions of Japanese firms, noting that the existing literature primarily focuses on developed countries, such as the U.K., Australia, Canada, and the U.S.A., as well as on developing countries, such as Turkey, Malaysia, or Indonesia. The corporate governance mechanism in Japanese economies differs substantially from that of Anglo-Saxon economies; therefore, research findings derived from Anglo-Saxon countries may not be applicable [32]. Despite being one of the largest carbon emitters and a pro-environment country, Japan is surprisingly absent from the literature regarding carbon emissions and corporate governance. Therefore, it is imperative to acknowledge this distinction in the new Japanese corporate governance data derived from the NIKKEI NEEDS CGES database. Furthermore, we extend prior literature [33,34,35] that examines the impact of corporate governance attributes on several corporate sustainability factors. In this study, we demonstrate that several corporate governance attributes, such as board diversity, board independence, and a separate environmental management committee greatly contribute to reducing environmental degradation by corporations. Furthermore, we show that conventional notions regarding having a larger board with greater expertise will not necessarily improve the environmental performance of a firm. Hence, our research adds to the existing literature by demonstrating the influence of corporate governance attributes on corporate environmental performance.

Our study is closely related to those by [26,27] that investigated corporate environmental performance in the context of Japan. However, our study is substantially different from these studies. For example, [27] investigated the impact of board attributes on the environmental performance of Japanese firms. In his study, environmental performance was measured from newspaper reviews focusing on five environmentally-related aspects. In our study, we used an environmental performance score from the Refinitiv ESG database, which is more rigorous and standardized. Thus, our results can be generalized and compared with the findings of other similar studies, unlike [27]. In addition, in our studies we used three sub-categories of environmental performance: the emission reduction score, the product innovation score, and the resource reduction score, in addition to the composite environmental performance. However, ref. [27] used only one composite score of environmental performance. Similarly, ref. [26] investigated the impact of environmental management practices (EMPs) on financial performance, whereas our study aimed to investigate the impact of board attributes on environmental performance.

The remainder of the paper is structured as follows. A review of literature is presented in Section 2. We describe our theoretical framework in Section 3 in relation to the hypotheses developed. In Section 4, we describe the methodology of the study. Section 5 presents the statistical findings. In Section 6, we discuss the paper’s conclusions and limitations.

2. Literature Review

There is a wide variety of studies in the literature investigating the impact of corporate governance attributes on environmental performance. Many studies use global samples [36], while others use country-specific samples [37]. The earlier literature focuses on the association between firm characteristics and greenhouse gas emission disclosures [12,13,14], as well as on the relationship between policy adoption and carbon emissions disclosures [15,16]. Several studies examine the association between selected corporate governance attributes and disclosures related to corporate environmental performance and carbon emissions [17,18,19]. The literature has examined board size, board independence, board diversity, CEO duality, and the environmental management committee among other corporate governance attributes. For example, boards with higher proportions of independent directors are reported to be more capable of balancing a firm’s financial and non-financial goals during complex environmental decision-making [10,38]. Similarly, female directors are reported to be more considerate of social issues and environmental concerns in the companies they serve [11,39,40]. However, most of the studies [17,20,21,22] are set in the context of developed countries such as the U.S.A., the U.K., Australia, and Canada with a handful sporadically focusing on developing countries [24]. In this regard, there is a paucity of studies focusing on Japan’s carbon emissions and corporate governance practices. Among the major contributors to global greenhouse gas emissions, Japan has entered the 2030 Paris Agreement with several other leading emitters to control and keep global warming temperatures below 2° Celsius. This new target represents a notable improvement over the previous 26% target for Japan’s commitment to limiting environmental degradation. We examine how corporate governance attributes influence the firm’s carbon emissions’ policies and environmental protection decisions in the Japanese context.

3. Theoretical Framework and Hypotheses Development

In this section, we investigate several attributes of corporate boards and formulate the hypotheses of the study within the theoretical framework of agency theory and resource dependence theory.

Agency theory assumes an asymmetry of interest between the principal (shareholders) and the agent (management) [41]. The proponents of the theory argue that the conflict of interest remains between shareholders and management, because the latter’s self-serving tendency hampers the former’s long-term benefit [42]. For instance, management may prioritize short-term profitable projects or investments to increase management compensation over long-term value-enhancing investments, therefore increasing agency costs for the shareholders. Previous studies have found that corporate board characteristics can affect such agency costs [43,44,45]. For example, an active and vigilant board, by continuously monitoring management’s actions, can ensure that management make correct effective strategic decisions and do not misuse firm resources [45,46] Similarly, independent directors on the board can effectively monitor the activities of agents or management [47]. Their independence from the daily business activities means that the independent directors can ensure high levels of transparency in managerial decisions and actions [48]. In the same way, transparency in management strategies is ensured when there is separation of roles between the CEO and the board chairman, indicating that CEO duality increases a firm’s agency cost [10]. Following these findings and conclusions, a more independent board both in terms of directorship structure and CEO duality, may lead to an improvement in environmental performance of a firm.

Resource dependence theory recognizes a corporate board’s ability to enable a firm’s external dependency and resource acquisition, and [49] identify four ways in which boards can help firms achieve these benefits. Boards can (a) provide advice or counsel, (b) facilitate information flow between a firm’s internal and external environment, (c) provide or facilitate resources, and (d) help gain legitimacy. Studies on firm performance and board size has found a positive association between the two, indicating that a larger board generally provides a firm with more accessible resources by assembling different counsel, capabilities, and expertise on the board [50,51]. Similarly, boards with more expert directors were often found to support and initiate effective strategies [52,53]. Again, a highly diversified board in terms of gender can bring about diverse outlooks, opinions, and perceptions, ultimately enriching the human and intellectual resources of a firm [54,55]. Therefore, if diverse and expert people are assembled in a large board, it could be expected that the incremental resources a firm could acquire, through expertise and other resources, are likely to contribute to an enhanced environmental performance of the firm.

3.1. Board Size and Environmental Performance

Refs. [56,57] have reported that smaller boards have a greater impact on communication efficiency, ultimately leading to greater accountability and commitment. Larger boards negatively affect the effectiveness of a firm’s governance, as reported by [58,59]. On the other hand, few studies have shown that smaller board sizes negatively impact different aspects of a board. According to [60], the expertise of smaller boards is less diversified than larger boards. Additionally, [61] add to this argument by stating that a smaller board may hinder the capability of the members to address other issues in relation to social and environmental conflict. In addition, larger boards offer a greater diversity of education and experience than smaller ones [55]. Ref. [62] found that larger boards facilitate better disclosure of financial, social, and environmental information to people, therefore reducing uncertainty. Having a larger board structure allows for a greater heterogeneity of background expertise, diversity, and experience, which can be beneficial for achieving a variety of outstanding ideas about environmental and social involvement [63]. Due to the diverse backgrounds of the members of a larger board, it is likely that the members are committed to corporate sustainability. Ref. [8] and [42] both reported that larger boards have a significant effect on the social and environmental performance of a firm because greater CSR disclosure is associated with larger boards. Similarly, ref. [64] found a positive correlation between board size and environmental ratings. Following these findings and suggestions, we argue that a larger board will have greater resources in the form of specialists to address various aspects of the business; therefore, the chance of the board encouraging better environmental performance is greater. We hypothesize the following:

H1. 

Board size is positively related to the environmental performance of a firm.

3.2. Board Independence and Environmental Performance

Boards with independent governing systems can effectively monitor and control the activities of agents [47]. The incorporation of independent directors is not only in the organization’s long-term interest, but also ensures high levels of transparency, because they operate independently of daily operations [48]. In contrast with their internal counterparts, these external directors are less accountable to shareholders and managers. A number of studies have demonstrated the correlation between board composition, measured by the percentage of independent board members, and environmental performance [65,66]. Ref. [67] as well as [68] have demonstrated that independent directors are more inclined to care about charitable and philanthropic themes than internal directors. Directors with an independent status, again, are more likely to address prospective environmental concerns and invest in such matters for the long term [69]. Earlier empirical studies showed conflicting results on the relationship between board independence and environmental performance. In a study in the U.K., ref. [10] concluded that a company was more likely to be ecologically transparent with more independent directors on the board. According to [70], using a sample of 100 U.S. companies in Global Fortune, a higher number of independent directors on the board is associated with a better quality of environmental and social performance. In contrast, ref. [71] found a poorer quality of environmental performance when there was a greater proportion of independent directors, potentially indicating that this resulted from the inertia of the independent directors or the inability of pursuing managers to initiate more eco-friendly actions. However, if independent directors are actively monitoring and engaging in overviewing the management’s decisions and strategies to reduce agency costs, the management is likely to refrain from undertaking environmentally negative projects and actions, ultimately leading to the improved environmental performance of the firm. We lean towards this expectation and, therefore, hypothesize the following:

H2. 

Board independence is positively related to environmental performance of a firm.

3.3. Board Diversity and Environmental Performance

A diversified board ensures that management makes better decisions and facilitates the problem-solving capacity, a stronger and more competitive corporate strategy, as well as better social and environmental decisions [62,72]. The presence of more female directors on a board contributes to enhancing a firm’s intellectual resources [54] and increases an organization’s efficiency and competitiveness [55]. By adding more women with strong knowledge and skills pertaining to natural environments, a firm can gain access to resources it has previously lacked [73,74]. Environmental performance and gender diversity show mixed results empirically. Some studies indicate that board diversity has a marginal or no effect on a firm’s environmental performance [36,75]. However, in an empirical study on 296 U.S. firms between 2008 and 2012, ref. [6] found a positive correlation between gender diversity and environmental performance. Furthermore, ref. [11] report that gender diversity on boards is positively correlated with an organization’s environmental performance. Following these arguments, we hypothesize the following:

H3. 

Board gender diversity is positively related to environmental performance.

3.4. CEO Duality and Environmental Performance

There is evidence that the existence of a CEO as the chair of the board compromises the independence of the board by reducing transparency and accountability [10]. If the same person holds both chairperson and CEO roles, a conflict of interest arises and the line between management and control is blurred [76]. Due to the dual roles of the CEO, his or her decisions may not consider the greater interests of the stakeholders. Based on these arguments, it is likely that the presence of a dual CEO–chair will make it less likely for the board to approve immediate investments in environmental opportunities with long payback periods if the CEO is faced with a compelling motive to maximize short-term financial gains at the expense of strategic investments in environmental opportunities. Therefore, ref. [77] argue that the combination of the two roles is an indicator of the CEO’s unfair power over the board. When the board chair and CEO roles are separated, management responsibility is more efficient, the agency cost is decreased, and performance improves. The more independent the board is, the more likely it is to have an impact on the environmental performance of the organization. Ref. [78] found that CEO duality had a marginally negative impact on social disclosures, but no impact on environmental and governance disclosures. Ref. [64] found a positive relationship between CEO duality and environmental performance. However, other researchers found no significant impact of CEO duality on sustainability initiatives [10,79]. Considering the above discussion, we hypothesize that CEO duality in a Japanese setting will negatively impact environmental performance:

H4. 

CEO duality is negatively related to environmental performance of a firm.

3.5. The Existence of a Sustainability and Environmental Committee

Creating a separate environmental or sustainability committee on the board serves primarily to develop strategies and rules to manage social and environmental risks [80]. Companies that are concerned about sustainability issues usually establish a separate committee for that purpose [81]. An environmental committee can plan, implement, and review environmental policies diligently [10]. An environmental committee within a firm also signifies the board’s commitment to sustainability and environmental development [37,70]. Moreover, a separate environmental committee in a company encourages the management to disclose and communicate environmental and social information, thus enhancing environmental performance [10,56]. We propose the following hypothesis based on the above discussion:

H5. 

Existence of a separate environmental committee has a positive and significant impact on environmental performance of a firm.

4. Data and Methodology

4.1. Data and Sample

The sample consisted of 428 Japanese companies listed on the Tokyo Stock Exchange between 2006 and 2019. We collected data from four sources: the ESG database of Thomson Reuters, the Eikon database of Thomson Reuters, the Bloomberg database, and the NIKKEI CGES database. Environmental data were collected from the Thomson Reuters’ Asset4 database, and corporate governance data were collected from the Bloomberg and NIKKEI CGES databases. The other financial variables were obtained from the Thomson Reuters Eikon database. After merging all these data sources, the final sample included 428 firms (excluding financial firms) with 4617 firm-year observations from the period 2006–2019.

4.2. Dependent Variable: Environmental Performance

Previous studies have used the environmental performance metrics as a means to measure the impact of corporate carbon emissions on the environment [82,83]. The environmental performance metrics measure a company’s overall operational impact on the greater environment and eco-system. It considers how a firm best utilizes management practices to combat environmental resource depletion and to strengthen long-term shareholder value by capitalizing on environmental opportunities. We retrieved the environmental performance score from the Refinitiv ESG database. Following several previous studies on corporate social performance [84,85,86], we used the three Thomson Reuters Asset4 sub-dimensions of environmental performance: emission reduction score, product innovation score, and resource reduction score. The emission reduction score reflects a company’s attentiveness and efficacy towards the reduction in environmental emissions in its operational and production processes. The product innovation score measures the company’s ability to create new market opportunities through investing in research and development to develop new eco-friendly technologies and manufacture eco-efficient products or services. The resource reduction score measures a company’s ability to create and implement eco-efficient techniques within the supply chain to reduce the use of water, energy, and natural resources.

4.3. Key Independent Variables: Corporate Governance Attributes

The key independent variable for our study was the corporate governance attributes of companies. Based on the literature, we argue that the five corporate governance attributes board size, board independence, board diversity, CEO duality, and the environmental management committee may significantly enhance the environmental performance of the companies. Hence, for this study we employed the five corporate governance attributes given above as our independent variables. Board size was measured as the total number of directors on the board [87]. Board independence referred to the percentage of independent (outside) directors serving on the board [42]. Board diversity represented the percentage of female directors on the board [45]. The CEO duality equaled 1 if the CEO and the chairman of the board was the same person; otherwise, its value was 0. We created a dummy variable by assigning 1 to the companies having a separate environmental management committee; otherwise, it assigned as 0.

4.4. Control Variables

Following previous studies, we controlled for firm-specific characteristics [42,88] that may impact the environmental performance. First, we controlled for firm size measured by the natural log of total assets in USD-millions. It is more likely that larger firms will show a vested interest in addressing environmental issues. Second, we controlled for the firm’s accounting profitability with ROA. Companies with higher profitability have better environmental performance [89]. We also controlled for leverage measured as total debts by total assets. Higher leverage firms tend to have higher environmental disclosure [90]; thus, we predicted that leverage would also have an impact on environmental performance. Tangibility was measured as the ratio of the property, plant, and equipment (PPT) to the total assets. We controlled the profit margin of the firm and calculated it by dividing the firm’s profits by the total sales. We then employed a price-to-book ratio, measured as the market price divided by the book price. A higher market-to-book value indicates future investment and growth opportunities, which increases the probability of improving environmental performances. We controlled two country-level indicators—GDP growth and inflation. The GDP growth was calculated by percentage change in GDP per annum [91]. All variables are defined in

Table 1. Definitions of Variables.

Variables	Definition	Source
Dependent Variable
Environmental Score	Firm’s impact on the complete eco-system, including every living and non-living natural system, as well as impact on land, air and water	Thomson Reuters Eikon Database
Emission Reduction	Reflects a company’s attentiveness and efficacy towards the reduction in environmental emission in its operational and production processes	Thomson Reuters Eikon Database
Product Innovation	The company’s ability to create new market opportunities through investing in research and development to develop new eco-friendly technologies and manufacture eco-efficient products or services	Thomson Reuters Eikon Database
Resource Reduction	The company’s ability of creation and implementation of eco-efficient techniques within the supply chain to reduce the use of water, energy and natural resources	Thomson Reuters Eikon Database
Independent Variables
Board Size	Natural logarithm of number of the board of directors	NIKKEI CGES Database
Board Independence	The number of board members who do not perform any day-to-day operation of the business	NIKKEI CGES Database
Board Diversity	The number of female members within the board of directors	Bloomberg Database
CEO Duality	The number of board member holding the post of CEO and board chair at the same time	Bloomberg Database
Environmental Management Committee	The presence of a separate committee for overlooking firm’s impact on the environment	Thomson Reuters Eikon Database
Control Variables
Size	The natural logarithm of the book value of a firm’s asset	DataStream
ROA	Net Income before extraordinary items and discontinued operations divided by total assets multiplied by 100	DataStream
Leverage	Ratio of firm’s total long-term debt to the book value of the total asset	DataStream
Tangibility	The ratio of a firm’s total long-term assets to total assets	DataStream
Profit Margin	The ratio of net income to net sales	DataStream
Price to Book	The ratio of market price to book price	DataStream
GDP Growth	Percentage growth of Gross Domestic Product	World Development Indicators
Inflation	Year to year change of CPI Index	World Development Indicators

.

4.5. Econometric Specification

To examine the association between environmental performance and corporate governance attributes, we estimated the following model:

$${\mathrm{Environmental}\mathrm{Performance}}_{\mathrm{it}}=\mathsf{\alpha }+{\mathsf{\beta }\mathrm{CG}}_{it}+{\mathsf{\gamma }\mathrm{X}}_{\mathrm{it}}+{\mathsf{\delta }\mathrm{Y}}_{\mathrm{mt}}+{\mathrm{Industry}}_{\mathrm{k}}+{\mathrm{Year}}_{\mathrm{t}}+{ϵ}_{\mathrm{it}}$$

where the dependent variable is the environmental performance of the firm, I, in year t; CG is one of the corporate governance attributes (i.e., board size, board independence, board diversity, CEO duality and environmental management committee); and ${\mathrm{X}}_{\mathrm{it}}$ is a set of firm-level control variables such as size, profitability (ROA), leverage, tangibility, market-to-book ratio, and profit margin in year t. ${\mathrm{Y}}_{\mathrm{mt}}$ is a set of country-level control variables such as the GDP growth rate and the inflation of country m in year t. We incorporated fixed-effects in the model because the firm’s carbon emissions could be partly driven by common unobserved year effects. We also used industry-fixed effects and standard errors, clustered at the industry level, where an industry was defined based on its two-digit GICS code.

5. Statistics Summary and Empirical Results

5.1. Statistics Summary

Table 2. Summary Statistics.

	N	Mean	Std. Dev.	Median	Min	Max
Environmental Score	4617	63.05	32.66	80.65	8.36	97.45
Emission Reduction	4617	59.06	26.82	61.57	0.40	99.88
Product Innovation	4617	63.61	32.23	76.03	12.30	99.68
Resource Reduction	4617	58.01	31.82	69.11	7.00	97.46
Board Size	4617	11.31	4.25	11.00	3.00	50.00
Board Independence (%)	4617	17.13	16.76	14.29	0.00	86.67
CEO Duality	4617	0.55	0.50	1.00	0.00	1.00
Board Diversity	4617	2.35	5.02	0.00	0.00	42.86
Environmental MGT	4617	0.52	0.50	1.00	0.00	1.00
Size	4617	20.63	1.36	20.41	16.42	26.42
ROA (%)	4617	3.69	4.79	3.17	−64.19	35.67
Leverage (%)	4617	53.54	22.56	53.92	3.60	102.01
Tangibility (%)	4617	30.28	20.20	27.67	0.05	94.85
Profit margin (%)	4617	9.66	11.05	7.11	−118.63	63.48
Price to book (%)	4617	1.56	1.46	1.25	−4.96	23.21
GDP growth (%)	4617	0.74	2.16	1.42	−5.42	4.19
Inflation (%)	4617	0.24	1.00	−0.01	−1.35	2.76

This presents summary statistics of dependent variable, independent variables and other control variables used in this study. All variables are defined in Table 1 and winsorized at the 1% and 99% levels.

presents the descriptive statistics among the study variables. The environmental performance score demonstrates a significant dispersion, ranging from a minimum of 8.36 to a maximum of 97.45, with mean and median values of 64.06 and 82.01, respectively. The three sub-scores of environmental performances also show a wide spread of the variables. For example, the average (median) emission reduction score is 59.06 (61.57) with a standard deviation of 26.82, the production innovation score is 63.61 (76.03), and the resource reduction is 58.01 (69.11). The average board size is 11.31, while the average percentage for board independence is 17.13%. The mean value of the dichotomous variable, the existence of an environmental management committee, is 0.53. Additionally, the average size of a firm (log of total asset) is 20.54. On average, the sample firms have a 52.96% leverage, a 4.03% ROA, and a 29.45% tangibility. The average profit margin and the price-to-book ratio of the sample firms are 9.93% and 1.70%, respectively. Finally, the two macro-economic factors, GDP growth and inflation, show mean values of 0.86% and 0.30%, respectively.

Table 3. Correlation Matrix.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)	(14)	(15)	(16)	(17)
(1) Environmental Score	1.00
(2) Emission Reduction	0.73 *	1.00
(3) Product Innovation	0.88 *	0.57 *	1.00
(4) Resource Reduction	0.93 *	0.70 *	0.74 *	1.00
(5) Board Size	0.09 *	0.03 *	0.08 *	0.09 *	1.00
(6) Board Independence	0.14 *	0.21 *	0.09 *	0.16 *	−0.01 *	1.00
(7) CEO Duality	−0.25 *	−0.19 *	−0.20 *	−0.22 *	−0.22 *	−0.13 *	1.00
(8) Board Diversity	0.05 *	0.11 *	−0.02	0.06 *	−0.04 *	0.20 *	−0.04 *	1.00
(9) Environmental Mgt	0.68 *	0.54 *	0.54 *	0.68 *	0.08 *	0.12 *	−0.19 *	0.05 *	1.00
(10) Size	0.26 *	0.30 *	0.21 *	0.27 *	0.29 *	0.17 *	−0.30 *	0.11 *	0.17 *	1.00
(11) ROA	−0.11 *	−0.03 *	−0.11 *	−0.10 *	−0.13 *	0.00	0.15 *	0.09 *	−0.06 *	−0.34 *	1.00
(12) Leverage	0.04 *	0.05 *	0.05 *	0.03 *	0.18 *	0.03	−0.23 *	0.03 *	−0.02	0.61 *	−0.45 *	1.00
(13) Tangibility	0.05 *	−0.12 *	0.01	0.05 *	0.22 *	−0.12 *	−0.17 *	−0.09 *	0.04 *	−0.05 *	−0.14 *	0.06 *	1.00
(14) Profit margin	−0.24 *	−0.09 *	−0.22 *	−0.21 *	−0.06 *	0.02	0.13 *	0.09 *	−0.19 *	0.03 *	0.44 *	−0.08 *	−0.16 *	1.00
(15) Price to book	−0.14 *	−0.06 *	−0.14 *	−0.10 *	−0.13 *	0.03 *	0.13 *	0.14 *	−0.10 *	−0.33 *	0.47 *	−0.15 *	−0.13 *	0.21 *	1.00
(16) GDP growth	0.00	0.01	−0.01	0.00	0.02	−0.01	0.00	0.06 *	−0.01	0.01	0.07 *	0.00	−0.01	0.03 *	0.06 *	1.00
(17) Inflation	0.01	0.02	0.01	0.00	−0.04 *	0.10 *	0.00	0.14 *	0.04 *	0.06 *	0.11 *	−0.03 *	−0.04 *	0.05 *	0.03 *	0.12 *	1.00

This table presents the pairwise correlations matrix for all variables used in this study. * denotes statistical significance of coefficient estimates at the 5% level. All variables are defined in Table 1.

presents a pairwise correlation analysis. Most of the variables are statistically significant at a minimum 5% level. Board size, board independence, board diversity, and the presence of an environmental management committee; all show a positive and significant correlation with the aggregated environmental score as well as with the three sub-scores for environmental performance (i.e., the emission reduction score, product innovation score, and resource reduction score). Hence, this univariate result primarily supports our hypothesis that a firm’s board size, board independence, board diversity, and environmental management committee enhance the environmental performance of the firm. Moreover, the statistically significant associations between the control variables and the environmental score and its sub-scores suggest the necessity to control for these variables in our regression models.

5.2. Empirical Results

5.2.1. Board Size and Environmental Performance

Table 4. Impact of Board Size on Environmental Performance.

	(1)	(2)	(3)	(4)
	Environmental Score	Emission Reduction Score	Product Innovation Score	Resource Reduction Score
Board Size	−0.392 ***	−0.263***	−0.497 ***	−0.262 ***
	(0.083)	(0.094)	(0.102)	(0.093)
Size	17.377 ***	12.100***	16.616 ***	15.792 ***
	(0.955)	(1.079)	(1.171)	(1.064)
ROA	−0.149 **	−0.153 *	−0.119	−0.156 *
	(0.074)	(0.084)	(0.091)	(0.083)
Leverage	−0.210 ***	−0.205 ***	−0.303 ***	−0.124 ***
	(0.036)	(0.041)	(0.045)	(0.041)
Tangibility	0.130 **	−0.063	0.041	0.195 ***
	(0.052)	(0.059)	(0.064)	(0.058)
Profit margin	−0.063 *	−0.008	−0.114 ***	−0.043
	(0.035)	(0.040)	(0.043)	(0.039)
Price to book	0.913 ***	0.043	0.800 ***	0.852 ***
	(0.226)	(0.255)	(0.276)	(0.251)
GDP growth	−0.243 ***	0.039	−0.445 ***	−0.140
	(0.091)	(0.103)	(0.112)	(0.102)
Inflation	−0.597 ***	−0.511 **	−0.450 *	−0.596 ***
	(0.207)	(0.234)	(0.254)	(0.231)
Constant	−283.710 ***	−174.079 ***	−257.921 ***	−264.212 ***
	(20.047)	(22.655)	(24.563)	(22.321)
Obs.	4617	4617	4617	4617
R-squared	0.089	0.041	0.068	0.057
Industry effects	Yes	Yes	Yes	Yes
Year effects	Yes	Yes	Yes	Yes

This presents regression results on the impact of Board Size on overall environmental performance score and its three sub-categories. p-values are in parentheses. All regression control for the industry and year fixed effects. Definitions of all variables are provided in Table 1. Superscripts ***, **, * denote statistical significance at 1%, 5%, and 10% level, respectively.

presents the regression results of the association between a firm’s board size and overall environmental performance scores and the sub-scores of environmental performances. Column 1 in Table 4 reveals that the firm’s board size has a significant negative relationship (β_{Board size} = −0.392, p < 0.01) with the overall environmental performance score. The findings suggest that firms with larger boards tend to have an adverse impact on the environmental performance score. In Column 2, we show that the board size also negatively impacts the emission reduction score (β_{Board size} = −0.263, p < 0.01). The coefficients of other measures of environmental performance also show consistent results: an increase in the number of board members tends to result in a decrease in both the product innovation score (β_{Board size} = −0.497, p < 0.01 in Column 3) and the resource reduction score (β_{Board size} = −0.262, p < 0.01 in Column 4). All the coefficients of firm-specific and macro-economic variables are statistically significant. The findings contradict our hypothesis, as the results show a negative relationship between board size and environmental performance. The plausible explanation for this could be that a larger board could become more inefficient as it may face delays in implementing decision-making and problem-solving strategies [92]. An inefficient or sluggish board will have less time to deal with environmental issues [59]; therefore, negatively impacting the firm’s environmental performance. Our findings are consistent with [93], who also document an inverse association between board size and environmental performance.

5.2.2. Board Independence and Environmental Performance

Table 5. Impact of Independent Directors on Environmental Performance.

	(1)	(2)	(3)	(4)
	Environmental Score	Emission Reduction Score	Product Innovation Score	Resource Reduction Score
Board Independence	0.209 ***	0.148 ***	0.276 ***	0.207 ***
	(0.023)	(0.026)	(0.028)	(0.026)
Size	14.481 ***	10.055 ***	12.792 ***	12.912 ***
	(1.003)	(1.138)	(1.227)	(1.117)
ROA	−0.130 *	−0.138 *	−0.094	−0.131
	(0.074)	(0.084)	(0.091)	(0.082)
Leverage	−0.185 ***	−0.187 ***	−0.270 ***	−0.099 **
	(0.036)	(0.041)	(0.044)	(0.040)
Tangibility	0.148 ***	−0.051	0.066	0.220 ***
	(0.052)	(0.059)	(0.064)	(0.058)
Profit margin	−0.054	−0.002	−0.102 **	−0.033
	(0.035)	(0.040)	(0.043)	(0.039)
Price to book	0.856 ***	0.002	0.725***	0.800 ***
	(0.224)	(0.254)	(0.274)	(0.250)
GDP growth	−0.240 ***	0.040	−0.442 ***	−0.137
	(0.091)	(0.103)	(0.111)	(0.101)
Inflation	−0.694 ***	−0.581 **	−0.582 **	−0.713 ***
	(0.206)	(0.234)	(0.252)	(0.230)
Constant	−233.889 ***	−138.769 ***	−191.901 ***	−213.481 ***
	(20.768)	(23.571)	(25.415)	(23.134)
Obs.	4617	4617	4617	4617
R-squared	0.101	0.046	0.084	0.070
Industry effects	Yes	Yes	Yes	Yes
Year effects	Yes	Yes	Yes	Yes

This table presents the regression results on the impact of Independent Directors on overall environmental performance score and its three sub-categories. p-values are in parentheses. All regression control for the industry and year fixed effects. Definitions of all variables are provided in Table 1. Superscripts ***, **, * denote statistical significance at 1%, 5%, and 10% level, respectively.

presents the regression results for the relationship between board independence and environmental performance measures. The coefficient of board independence shows the positive association with the environmental performance score (β_{Board independence} = 0.209, p < 0.01, Column 2). Similar positive associations are reported for all the other variables of the environmental performance measures and the relationships are statistically significant at 1%. Independent directors operate at arm’s length from the company management; thus, they can challenge top management decisions and pressurize the board to engage in sustainable activities, resulting in better environmental performance. Independent directors with heterogenous background and expertise are more likely to engage in more environmentally sustainable practices [20]. Similarly, [70] found that the number of independent directors on a board is associated with better social and environmental performance for U.S.-based companies.

5.2.3. Board Diversity and Environmental Performance

Table 6. Impact of Board Diversity on Environmental Performance.

	(1)	(2)	(3)	(4)
	Environmental Score	Emission Reduction Score	Product Innovation Score	Resource Reduction Score
Board Diversity	0.383 ***	0.178 ***	0.405 ***	0.376 ***
	(0.047)	(0.055)	(0.065)	(0.059)
Size	15.346 ***	13.198 ***	13.721 ***	12.919 ***
	(0.893)	(1.036)	(1.164)	(1.063)
ROA	−0.128 *	−0.120	−0.129	−0.091
	(0.068)	(0.079)	(0.085)	(0.078)
Leverage	−0.174 ***	−0.163 ***	−0.222 ***	−0.111 ***
	(0.034)	(0.040)	(0.044)	(0.040)
Tangibility	0.139 ***	−0.038	0.162 **	0.245 ***
	(0.049)	(0.057)	(0.064)	(0.058)
Profit margin	−0.074 **	−0.046	−0.095 **	−0.062 *
	(0.033)	(0.039)	(0.041)	(0.038)
Price to book	0.963 ***	0.550**	0.857 ***	0.766 ***
	(0.232)	(0.269)	(0.288)	(0.263)
GDP growth	−0.023	0.160	−0.168	0.068
	(0.086)	(0.100)	(0.104)	(0.095)
Inflation	−0.612 ***	−0.506 **	−0.545 **	−0.635 ***
	(0.194)	(0.225)	(0.235)	(0.215)
Constant	−248.222 ***	−202.731 ***	−211.731 ***	−210.095 ***
	(18.636)	(21.631)	(24.287)	(22.177)
Obs.	4617	4617	4617	4617
R-squared	0.114	0.059	0.066	0.066
Industry effects	Yes	Yes	Yes	Yes
Year effects	Yes	Yes	Yes	Yes

This table presents regression results on the impact of Board Diversity on overall environmental performance score and its three sub-categories. p-values are in parentheses. All regression control for the industry and year fixed effects. Definitions of all variables are provided in Table 1. Superscripts ***, **, * denote statistical significance at 1%, 5%, and 10% level, respectively.

represents the regression results for the association between board diversity and a firm’s environmental performance score and its sub-scores. In Column 1, we show that board diversity has a positive effect on the environmental score (β_{Board diversity} = 0.383, p < 0.01). Additionally, our results in Columns 2 through to 4 reveal that board diversity has a positive impact on the emission reduction score (β_{Board diversity} = 0.178, p < 0.01), product innovation score (β_{Board diversity} = 0.405, p < 0.01), and resource reduction score (β_{Board diversity} = 0.376, p < 0.01). Our regression results show that a diversified board will significantly improve environmental performance. Haque (2017) [20] documents that board gender diversity has a significant positive relationship with carbon-reduction initiatives. Female members within the board tend to be more responsive towards environmental issues than their male peers [10,94]. Women are deemed to have the intrinsic virtue of being more socially responsible, encouraging the board to contribute to improved environmental performance [11]. It is evident that gender diversity on the board can enhance environmental performance [45,71,86].

5.2.4. CEO Duality and Environmental Performance

The regression results for the association between CEO duality and environmental performance measures are reported in

Table 7. Impact of CEO Duality on Environmental Performance.

	(1)	(2)	(3)	(4)
	Environmental Score	Emission Reduction Score	Product Innovation Score	Resource Reduction Score
CEO Duality	0.003	0.430	0.711	0.717
	(0.569)	(0.678)	(0.717)	(0.659)
Size	14.920 ***	12.494 ***	12.326 ***	13.091 ***
	(0.842)	(1.005)	(1.103)	(1.014)
ROA	−0.076	−0.045	−0.049	−0.021
	(0.062)	(0.074)	(0.076)	(0.070)
Leverage	−0.153 ***	−0.130 ***	−0.165 ***	−0.106 ***
	(0.033)	(0.040)	(0.042)	(0.039)
Tangibility	0.019	−0.019	0.092	0.087
	(0.048)	(0.057)	(0.062)	(0.057)
Profit margin	−0.019	−0.017	−0.009	−0.041
	(0.030)	(0.036)	(0.037)	(0.034)
Price to book	2.025 ***	1.493 ***	2.006 ***	1.840 ***
	(0.258)	(0.308)	(0.320)	(0.294)
GDP growth	0.227 ***	0.388 ***	0.130	0.278 ***
	(0.075)	(0.090)	(0.090)	(0.083)
Inflation	−0.865 ***	−0.752 ***	−0.791 ***	−0.924 ***
	(0.168)	(0.201)	(0.201)	(0.185)
Constant	−237.356 ***	−191.410 ***	−184.985 ***	−209.918 ***
	(17.642)	(21.071)	(23.055)	(21.197)
Obs.	4617	4617	4617	4617
R-squared	0.115	0.065	0.058	0.073
Industry effects	Yes	Yes	Yes	Yes
Year effects	Yes	Yes	Yes	Yes

This table presents results on the impact of CEO Duality on overall environmental performance score and its three sub-categories. p-values are in parentheses. All regression control for the industry and year fixed effects. Definitions of all variables are provided in Table 1. Superscripts *** denotes statistical significance at 1%, level.

. Column 1 in Table 7 shows that CEO duality positively impacts a firm’s environmental performance score. CEO duality is also positively associated with the emission reduction score, product innovation score, and resource reduction score, as shown in Columns 2, 3, and 4, respectively. Contrary to our expectations, we found a positive correlation between CEO duality and the environmental performance variables. However, all the coefficients for these correlations were statistically nonsignificant. A similar inconclusive and nonsignificant positive relationship between CEO duality and voluntary environmental social governance disclosure was documented by [95].

5.2.5. Environmental Management Committee and Environmental Performance

In

Table 8. Impact of Environmental Management Committee on Environmental Performance.

	(1)	(2)	(3)	(4)
	Environmental Score	Emission Reduction Score	Product Innovation Score	Resource Reduction Score
Environmental Management Committee	14.502 ***	12.332 ***	10.472 ***	16.607 ***
	(0.589)	(0.672)	(0.751)	(0.659)
Size	16.002 ***	11.665 ***	15.132 ***	12.801 ***
	(0.783)	(0.894)	(1.046)	(0.918)
ROA	−0.128 *	−0.080	−0.102	−0.092
	(0.065)	(0.075)	(0.085)	(0.075)
Leverage	−0.156 ***	−0.167 ***	−0.270 ***	−0.078 **
	(0.031)	(0.035)	(0.040)	(0.035)
Tangibility	0.134 ***	0.017	0.048	0.224 ***
	(0.045)	(0.051)	(0.059)	(0.051)
Profit margin	−0.034	−0.006	−0.084**	−0.015
	(0.032)	(0.037)	(0.041)	(0.036)
Price to book	1.382 ***	0.637 ***	1.112 ***	1.145 ***
	(0.196)	(0.223)	(0.257)	(0.225)
GDP growth	−0.095	0.141	−0.312***	0.021
	(0.087)	(0.099)	(0.108)	(0.095)
Inflation	−0.497 **	−0.476 **	−0.413 *	−0.625 ***
	(0.196)	(0.224)	(0.246)	(0.216)
Constant	−271.262 ***	−179.877 ***	−241.069 ***	−218.318 ***
	(16.421)	(18.739)	(21.890)	(19.209)
Obs.	4617	4617	4617	4617
R-squared	0.214	0.122	0.111	0.181
Industry effects	Yes	Yes	Yes	Yes
Year effects	Yes	Yes	Yes	Yes

This table presents the regression results of the impact of the presence of an Environmental Management Committee on overall environmental performance score and its three sub-categories. p-values are in parentheses. All regression control for the industry and year fixed effects. Definitions of all variables are provided in Table 1. Superscripts ***, **, * denote statistical significance at 1%, 5%, and 10% level, respectively.

, we present the regression results to examine the impact of the environmental management committee on the corporate environmental performance. Column 1 of Table 8 shows that the firms that have an environmental management committee have a higher environmental score (β_{Environmental management committee} = 14.502, p < 0.01). Similar significant positive coefficients are reported for the emission reduction score (β_{Environmental management committee} = 12.332, p < 0.01), product innovation score (β_{Environmental management committee} = 10.472, p < 0.01) and resource reduction score (β_{Environmental management committee} = 16.607, p < 0.01), shown in Columns 2–4, respectively. The results imply that having an environmental management or sustainability committee will significantly improve the environmental performance of the firm. A sustainability committee can hold the board accountable to address and mitigate environmental issues. An environmental management committee within a company will plan and execute environmental policies to combat the adverse impact that companies may posit on the environment. Ref. [37] contend that the presence of an environmental committee forces the board to respond to the stakeholders’ sustainability demands and to scrutinize corporate environmental risk management strategies. Several prior research studies have also reiterated the importance of having a corporate environmental management or sustainability committee to improve corporate environmental performance [45,86], which is consistent with our findings.

6. Additional Test: The Role of Corporate Governance on Carbon Emissions

The data validity was tested by re-processing the regression results using an alternative estimation model. For this we used the firm’s actual raw carbon emissions as a proxy for environmental performance. The regression results are reported in

Table 9. Impact of board attributes on carbon emission.

	(1)	(2)	(3)	(4)	(5)
Dependent Variable	Total Carbon Emission	Total Carbon Emission	Total Carbon Emission	Total Carbon Emission	Total Carbon Emission
Board Size	0.009 ***
	(0.003)
Board Independence		−0.002 **
		(0.001)
Board Diversity			−0.002 **
			(0.001)
CEO Duality				0.033 **
				(0.013)
Environmental Management					−0.056 ***
					(0.010)
Size	0.019	−0.011	0.010*	0.004	−0.000
	(0.013)	(0.011)	(0.006)	(0.004)	(0.004)
ROA	0.001	0.004	0.002	0.001	0.001
	(0.002)	(0.004)	(0.002)	(0.002)	(0.001)
Leverage	0.001 **	0.005 ***	0.001 ***	0.001 ***	0.002 ***
	(0.001)	(0.001)	(0.000)	(0.000)	(0.000)
Tangibility	0.007 ***	0.010 ***	0.006 ***	0.006 ***	0.006 ***
	(0.001)	(0.001)	(0.000)	(0.000)	(0.000)
Profit margin	−0.001 *	0.001	−0.002 **	−0.001 ***	−0.001 **
	(0.001)	(0.002)	(0.001)	(0.000)	(0.000)
Price to book	−0.011 *	−0.017	−0.010 **	−0.012 ***	−0.011 ***
	(0.006)	(0.014)	(0.005)	(0.003)	(0.003)
GDP growth	0.000	−0.001	0.001	0.001	0.000
	(0.001)	(0.006)	(0.003)	(0.003)	(0.002)
Inflation	0.003*	−0.001	0.006	0.005	0.004
	(0.002)	(0.012)	(0.006)	(0.004)	(0.004)
Constant	−0.404	−0.122	−0.295 ***	−0.151 *	−0.146 **
	(0.245)	(0.226)	(0.112)	(0.087)	(0.072)
Obs.	4617	4617	4617	4617	4617
R-squared	0.123	0.193	0.126	0.122	0.129
Industry effects	Yes	Yes	Yes	Yes	Yes
Year effects	Yes	Yes	Yes	Yes	Yes

This table presents the result on the impact of board attributes (i.e., board size, board independence, board diversity, CEO duality and environmental management committee) on the total carbon emission. p-values are in parentheses. All regression control for the industry and year fixed effects. Definitions of all variables are provided in Table 1. Superscripts ***, **, * denote statistical significance at 1%, 5%, and 10% level, respectively.

. Our results in Column 1 show that board size and total carbon emissions are positively linked, while board independence, in Column 2, is negatively related to the firm’s carbon emissions. Board diversity (Column 3) and the existence of an environmental management committee (in Column 4) are also negatively associated with carbon emissions. In most cases, the results are statistically significant at the 1% level. In this analysis, CEO duality has a significant positive association with carbon emissions. Except for CEO duality, overall, our analysis is consistent with the baseline regression results. Hence, the results further verify our main findings. Therefore, it can be stated that the regression results are robust with the alternative measure of firm’s environmental performance.

7. Conclusions

In this study, we examine how various corporate governance attributes impact environmental performance in Japan. In order to assess the impact on environmental performance, we use a variety of corporate governance attributes. These include board size, board independence, board diversity, CEO duality, the environment committee, and board composition. Using data from 428 firms from 2006 to 2019, we report that a separate environmental management committee, a more diverse board, and a greater level of board independence improve the environmental performance of a firm. Contrary to our expectations, the findings show that larger boards lead to a poorer environmental performance, while CEO duality has no significant impact. We found consistent results when we proxied environmental performance by using carbon emissions. As a major carbon emitter, and given Japan’s ambitious 2030 NDC target, we conclude that our study offers some noteworthy implications for regulators, policy makers, and investors to help resolve key sustainability issues. First, our research is a gateway to understanding the environmental performance of Japanese firms by focusing on multiple elements of the governance mechanisms. Moreover, by analyzing the correlation between corporate governance mechanisms and the environmental performance of Japanese firms, this study also aimed to outline the involvement of these firms in CSR activities. Essentially, firms which minimize their involvement in carbon emissions are regarded engaging in CSR activities. Hence, while drawing conclusions for firms in Japan whose governance mechanism contributes to controlling carbon emissions, we have ultimately demonstrated the affiliation of Japanese firms with CSR. Hence, regulators in Japan can monitor how the Japanese firms are reshaping their board structures in order to minimize carbon emissions. Second, policymakers can derive corporate strategies regarding the structuring of corporate governance to improve environmental performance. In summary, this research can assist policymakers to formulate and devise board structures that would alleviate the global issue of environmental degradation. For instance, policymakers can encourage heterogeneity within the board and include a greater number of independent directors to reduce the carbon emissions rate. Finally, another potential policy implication from our research could be that policymakers can create mandatory guidelines for the establishment of a separate environmental management committee to ensure that corporations commit to sustainability and reduce greenhouse gas emissions over the long term.