Environmental Responsibility of Indonesian Manufacturing Companies

Manufacturing companies have responsibility to participate in reducing the environmental problems impacted by their operations. This study aims to identify the efforts of Indonesian manufacturing companies in abating environmental impacts caused by their production processesand to understand the behaviour of manufacturing companies in providing environmental information to their stakeholders. The population of this study are all manufacturing companies listed on the Indonesia Stock Exchange (IDX) and PROPER in 2012-2016. By employing purposive sampling, the study collected 135 data from 27 companies. On average, Indonesian manufacturing companies earned grade of 3 (Blue) in implementing PROPER. The extent of environmental disclosure is only around 38%. Environmental disclosure of manufacturing companies is influenced by rete of environmental performance and company size. Environmental performance is significantly affected by profitability and size. Leverage does not influence environmental performance, environmental disclosure, and profitability. The level of environmental disclosure is mostly descriptive and does not have a specific time frame. Indonesian manufacturing companies should improve their environmental performance and environmental disclosure.


Introduction
Environmental issues resulted from company operations have occurred multiple times in Indonesia (Yanto Heri and Muzzammil, 2016). This shows that the companies have not maximally anticipated the environmental impacts (Wulandari and Kiswanto, 2016). According to the report of the Ministry of Environment and Forestry that there are 125,540,827.76 tons of B3 waste from 269 companies of mining, energy and oil & gas sectors, manufacturing sector, agro-industrial sector and facilities and services sector (KEMENLHK, 2017) Further, this ministry also releases information that the results of performance assessment show only 247,837.49 tons (0.32%) of B3 waste are treated in 2016.
The Government's attention to the importance of waste treatment generated by companies is expressed in Law Number 32 Year 2009 on the Environmental Protection and Management and Government Regulation of the Republic of Indonesia Number 74 on the Management of Hazardous and Toxic Materials. The Government also releases Law No. 40 Year 2007 on Limited Liability Companies with article 74 paragraph (1) stating that: A company which operates business activities in the field of and/or related to natural resources is required to implement Social and Environmental Responsibilities. In addition, the Government's concern on the environmental performance indicators is followed up by the implementation of the Corporate Performance Rating in Environmental Management Program (PROPER) conducted by the Ministry of Environment and Forestry (Yanto H. et al., 2017b).
Environmental performance disclosure attached in the annual report is the companies' good commitment on environmental preservation which would influence stakeholders' decision to support and invest in the companies. On the basis of triple bottom lines (economy, social and environment), the companies are required to be accountable not only for their financial condition, but also for social and environmental issues related to their activities.
However, the practice of environmental disclosure in Indonesia is still considered low. From the three themes of Corporate Social Responsibility (CSR) disclosure, the environment indicator is rated 5%, the economy indicator is rated 48%, and the social theme is rated 25% (Nurkhin, 2009). The research conducted by Djajadikerta and Trireksani (2012) also shows that corporate social and environmental disclosure practice in Indonesia is still classified low and mostly contains only declarative information without clear time frame. This is contradictory to the high demand of environmental disclosure (Suhardjanto D. and Choiriyah, 2010a). Pratiwi (2015) in her research explains that the quality and scope of information disclosure expressed in annual financial statement are quite helpful for investors to make investment decision. Any failure to make adequate disclosure may result in market failure (Ghozali et al., 2014). This potential market failure then justifies the Government's intervention in compelling the companies to make adequate disclosure. Moreover, Epstein and Freedman (1994) contend that 35.7% investors in their survey required audit of environmental disclosure made by the companies.
Many studies on the environmental disclosure have been conducted in Indonesia and other countries. Some studies try to measure how company's size influences the comprehensiveness of its environmental disclosure. The research conducted by Sulaiman et al. (2014), Aulia andAgustina (2015), Yanto Heri andMuzzammil (2016) and Hadjoh and Sukartha (2013) show that a company's size significantly influences the comprehensiveness of its environmental disclosure. Meanwhile, Suhardjanto Djoko and Choiriyah (2010b) and Smith et al. (2007) find that a company's size does not influence the comprehensiveness of its environmental disclosure.
Other studies are conducted to examine how leverage influences the comprehensiveness of company's environmental disclosure. The results of research conducted by Sulaiman et al. (2014) and Yanto Heri and Muzzammil (2016) show that leverage significantly influences the comprehensiveness of company's environmental disclosure, while the results of research conducted by Suhardjanto Djoko and Choiriyah (2010b) show that leverage variable does not significantly influence the comprehensiveness of company's environmental disclosure. Many studies have also been conducted on how profitability variable influences environmental disclosure. The research conducted by Aulia andAgustina (2015), Yanto Heri andMuzzammil (2016), and Suhardjanto D. and Choiriyah (2010a) shows that profitability significantly influences the comprehensiveness of environmental disclosure, while the research conducted by Sulaiman et al. (2014) shows that profitability does not significantly influence company's environmental disclosure.
According to the considerations above, the authors have decided to restudy the variables potentially influencing the comprehensiveness of company's environmental disclosure that there is still gap between previous studies. These variables comprise company size and leverage. In addition, the author also presents profitability and environmental performance as the intervening variables. Based on the signaling theory, a company with good financial condition would disclose more comprehensive environmental information. Environmental performance is also deemed to be able to strengthen the influence of exogenous variable on endogenous variable. Previous researches conducted by Aulia and Agustina (2015), He and Loftus (2014) and Fontana et al. (2015) show consistent results that environmental performance significantly influences the comprehensiveness of company's environmental disclosure.
This research focuses on manufacturing companies since their activities are relatively complex, thus they tend to produce more wastes. Yuliawati and Sukirman (2015) explain that manufacturing companies highly contribute to environmental and social issues. This research is limited to the manufacturing companies which participate in PROPER organized by the Ministry of Environment and Forestry.

Literature Review
There are three main theories employed in this research, comprising legitimacy theory, stakeholder theory, and signaling theory. Legitimacy theory focuses on interactions between company and the community (Ghozali et al., 2014) and states that organization continuously seeks for a way to secure their operations within applicable limitations and norms in the community. This theory explains the reasons company conducts environmental disclosure. Environmental disclosure is deemed medium which connects company and the community, which would influence community's view of the company, thus a good legitimacy could be created.
The second theory, stakeholder theory, explains the relationship between company and stakeholders. According to (Ghozali et al., 2014), the stakeholder theory states that company is not an entity which operates only for its own interest, but it should give benefit to its stakeholders. This theory assumes that to exist, a company needs support from the stakeholders, thus any activities it performs should be in line with stakeholders' expectations. A strategy to maintain this relationship is to perform its environmental responsibility in the form of environmental disclosure.
Signaling theory explains why a company is encouraged to present financial statement information to external parties. According to this theory, company's environmental activities present information to investors of better expected return in the future. Appropriate environmental disclosure as expected by stakeholders is a signal of good news for the public that a company has good future prospects.
Yanto Heri and Muzzammil (2016) found that a bigger company would have better access to capital market, thus it will have more funds to expand its operating activities. Besides, they also contend that a bigger company is likely to have bigger economic of scale, thus its production costs per unit could be reduced significantly to increase its profitability.
In addition, a company with higher asset value tends to be more flexible to manage its assets; thus it would have better chance of achieving its targeted profit. Niresh and Velnampy (2014) contended that goods may be manufactured with far lower costs by a big company. The research conducted by Kartikasari and Merianti (2016) shows that company size significantly influences profitability. According to the reviews above, the study formulates the following hypothesis:

H 1 : Company Size Significantly Influences Financial Performance
The stakeholder theory also explains the relationship between company's leverage and financial performance. A company with high leverage tends to enhance its financial performance as a form of responsibility to its creditors. It would attempt to deliver a message to its creditors that it is able to well manage its finance, thus the creditors' trust could arise to keep the company's future activities funded. In addition, a company with high leverage may also obtain high loan from its creditors, the fund of which may be utilized by the company to generate higher profit.
The study uses Debt Ratio (DR) as a proxy of leverage. DR is a company's total assets funded by its creditor. Higher DR shows that a company is at a higher risk, since it has higher debt in use for its assets purchase Murhadi (2015: 61). This company would be more carefully manage its assets in order to minimize the existing risks and to gain maximum profit. The research conducted by Ahmad et al. (2015) shows that leverage significantly influences profitability. According to the literature reviews above, the study formulates the following hypothesis: H 2 : Leverage significantly influences financial performance A bigger company tends to have higher attention from the community, thus it would always attempt to show its better performance. According to the stakeholder theory, a bigger company tries maintain its reputation in front of the stakeholders. Because of pressures the stakeholders impose on various matters, a bigger company could more carefully perform its activities which may affect its surrounding environment. This would then encourage the company to keep its environmental performance enhanced.
The results of research conducted by Sari and Ulupui (2014) show that company size positively influences PROPER. Management pays attention to company's reputation in front of the stakeholders, in which the management does not use the company's assets only for their own interest, but also for the shareholders owners' interest through environmental performance improvement (Sari and Ulupui, 2014). Therefore, the study formulates the following hypothesis: H 3 : Company size significantly influences environmental performance A more profitable company would be able to manage its finance and has more funds than less profitable company. Therefore, profitable companies tend to improve their performance in other fields, including in the area of environment. A more productive company could have better awareness to conduct waste management through environmental performance improvement. Based on the stakeholder theory, such a company will fulfill the stakeholders' expectation of a good environmental management. Sari and Ulupui (2014) explain that with high profitability, the management of a company will improve its environmental management, since with high gains, such a company will become public highlight. The research conducted by Vinayagamoorthi et al. (2015) shows that profitability significantly influences company's environmental performance. Therefore, the study formulates the following hypothesis: H 4 : Financial performance significantly influences environmental performance The stakeholder theory explains the relationship between company's leverage and environmental performance. According to Yanto Heri and Muzzammil (2016), higher leverage means that creditors as stakeholders take important position in a company. A company with higher leverage will attempt to improve its performance, including in environmental matter. It will more often interact with creditors; thus it will be encouraged to have better image in front of the creditors. The studies conducted by Kartikasari and Merianti (2016) and Mustika (2015) show that leverage significantly influences environmental performance.
H 5 : Leverage significantly influences environmental performance The signaling theory states that a company with good performance would make more disclosures. This is considered as signal by the company for the stakeholders that the company is operating well. A good environmental performance will encourage the company to make these information disclosures to the stakeholders, with an expectation that it will present "good news" which will enhance the company's value in front of the stakeholders. These disclosures are conducted by the company in attempt to distinguish itself from companies with bad environmental performance. Aulia and Agustina (2015) explain that environmental performance is management's consideration in making its environmental information disclosure. The relationship of these two variables may be explained using the voluntary disclosure theory. This theory predicts that a company with better environmental performance provides superior environmental disclosure both in quantity and quality (He and Loftus, 2014). The results of researches conducted by Aulia and Agustina (2015) and He and Loftus (2014) show that the environmental performance significantly influences environmental disclosure . Yanto Heri et al. (2017a) propose that environmental performance as reflected in PROPER is an environmental project performed by company in order to generate environmental information. Better PROPER implementation will generate more information which may be presented to stakeholders.
H 6 : Environmental performance influences environmental disclosure A bigger company shows higher responsibility to the community and the environment (Yanto Heri and Muzzammil, 2016). Bigger a company would have more interest in presenting more comprehensive social and environmental disclosure report (Ramadhan and Prastiwi, 2014). Environmental disclosure may be taken as medium for a company to show to the community that it has good environmental responsibilities. Therefore, such bigger company may maintain its reputation in front of the community. Company's disclosed information would also reduce any information asymmetry and create harmony between the company and the community.
The legitimacy theory explains how a big company fulfills the community's expectations through its environmental disclosure. According to Sulaiman et al. (2014), by fulfilling the community's expectation of environmental issues through its disclosure in annual report, a company may attempt to maintain its sustainability and growth. Aulia and Agustina (2015), Sulaiman et al. (2014), and Yanto Heri and Muzzammil (2016) show that the company size variable significantly influences environmental disclosure.
H 7 : Company size influences environmental disclosure Leverage show to the extent of a company's dependence on its creditors in funding its activities. Higher leverage will make a company more carefully disclose its performance related information. The stakeholder theory explains the relationship between leverage and environmental disclosure. Creditors as one of company's stakeholders have the right to information of environmental responsibility made by the company in return of their support of funding the company's assets. Therefore, creditors' trust in the company will be enhanced, thus they will keep the company's future funding. Deegan (2002) explains that financial institution, as part of their risk management policy, tends to require borrower to periodically present various items of information relating to social, environmental performance, and policy. One of managers' motivations to voluntarily disclose their environmental information is that they want to comply with such loan requirement. The study conducted by Yanto Heri and Muzzammil (2016), Sulaiman et al. (2014), and Chandok and Singh (2017) show that higher leverage will result in company's more comprehensiveness environmental disclosure.

H 8 : Leverage significantly influences environmental disclosure
To summary the proposed hypotheses, the figure below provides information of inter-variable relationship pattern.

Population and Sample
The population of this research is all manufacturing companies listed in Indonesia Stock Exchange (BEI) in the period of 2012-2016. By using the following three criteria: (1) listed in BEI; (2) issuing consecutive financial statements in 2012-2016; and (3) implementing the PROPER program, this research identifies 27 manufacturing companies. This research has collected 135 data with a five-year period of observation.

Research Variables
This research uses variables of environmental disclosure, company size, leverage, financial performance, and environmental performance as its variables. Environmental disclosure means manufacturing companies' environmental performance information disclosed in annual report. A content analysis is conducted to identify the points of indicator reported in financial statement. Company size is proxied company's total assets. Considering that the total assets vary, this research transforms the data using the natural logarithm formula. Leverage which is comparison of total debts and total assets is a reflection how a company depends on debt financing for its operations. Financial performance is measured using Return on Equity (ROE) which is comparison of net profit and total equities. Environmental performance is proxied with company's rating in PROPER implementation. There are five ratings of PROPER, consecutively Gold, Green, Blue, Red and Black. Company with Gold rating is valued 5 (highest) and with Black rating is valued 1 (lowest).

Data Analysis
This research collects the data using documentation method. The data are in the form of secondary data including annual report and financial statement of manufacturing companies listed in the Indonesia Stock Exchange (BEI) of the period of 2012-2016. In addition, this research employs secondary data in the form of PROPER rating issued by the Ministry of Environment and Forestry. This research employs descriptive statistics and path analysis, and the tests are conducted through multiple stages, comprising goodness of fit model and hypothesis test.

Descriptive Analysis
The descriptive statistics describes average, maximum and minimum values and standard deviation of the environmental disclosure (ED), company size (SIZE), leverage (LEV), financial performance (ROE) and environmental performance (EP) variables. The environmental disclosure variable (ED) has minimum value of 0.00, maximum value of 6.00, and average value of 3.88 with standard deviation of 1.66. Therefore ,industrial companies   (-0.094, p>0.05). The model below more clearly describes the inter-variable relationship pattern in this research.

Goodness of Fit Test
To examine the fitness of the model, this research employs the eight indices. The goodness of fittest shows that all required criteria have been met, thus the research models are entirely declared good fit. The table below provides index information of the models developed in this research.  research is that the Leverage variable does not influence Profitability, Environmental Performance and Environmental Disclosure.

Discussion
The hypothesis test results show that company size significantly influences financial performance. In addition, a positive relationship direction is found (0.319), which means that every one unit of company size increment will enhance profitability (as proxy of financial performance) for 0.319 unit. This is in line with the proposed theory that company's profitability will increase as company's size becomes bigger. A bigger company tends to more flexible and free to manage its assets; thus it will more easily achieve its target. According to Karina and Khafid (2015), a large amount of assets may be maximally used for company's operations to generate higher profit. This result is consistent with the research conducted by Yanto Heri and Muzzammil (2016), but is contradictory to the research conducted by Niresh and Velnampy (2014).
The hypothesis test results show that leverage does not significantly influence financial performance. This result is contradictory to the previously described theory that a company with higher leverage will increase its financial performance as a form of responsibility to its creditors. The leverage variable in this research does not have considerably high average, which is 43.61%. This means that manufacturing companies in BEI averagely have their assets funded by creditors for 43.61%. The managers may think that it is better to use capital derived from company's own profit than to continuously depend on creditors. Therefore, we may state that leverage is not the only reason for the managements to increase profit. The Pecking order theory explains that a company prefers utilizing internal source of fund to external source of fund. Based on this theory, a company will first utilize internal fund, then debt and finally equity in fulfillment of its need for financing (Yan, 2007). This result is consistent with the research conducted by Widiyanti and Elfina (2015) which finds that there is uncertain relationship between company's leverage and profitability.
The hypotheses test results show that the company size variable positively, significantly influences environmental disclosure, with estimated parameter value of 0.262. This means that every one unit of company size increment will enhance environmental performance for 0.262 unit. This result is in line with the previous theory. Based on the stakeholder theory, a bigger company will maintain its reputation in front of the stakeholders. Because of pressures the stakeholders impose on various matters, a bigger company will more carefully perform its activities which may affect its surrounding environment. This will then encourage the company to keep its environmental performance enhanced. This result is consistent with the research conducted by Sari and Ulupui (2014). Company's management pays attention to company's reputation in front of the stakeholders, in which the management does not use the company's assets only for their own interest, but also for the capital owners' interest through environmental performance improvement (Sari and Ulupui, 2014).
The hypothesis test results show that financial performance positively, significantly influences environmental performance, with estimated parameter value of 0.322. This means that every one unit of profitability increment will enhance environmental performance for 0.322 unit. This result is in line with the previous theory that a profitable company has more funds and tends to improve its performance of environmental management. Based on the stakeholder theory, a company attempts to fulfill community's expectation by providing good environmental management. According to (Sari and Ulupui, 2014), with higher profitability, the management would improve its environmental management, since with high profit, such a company will become public highlight. In addition, higher profit reflects company's high productivity. A more productive company tends to produce more wastes. Therefore, the companies would consistently improve their environmental management. This hypothesis test result is consistent with the research conducted by (Vinayagamoorthi et al., 2015) showing that profitability significantly influences company's environmental performance.
The hypotheses test results show that the leverage does not influence environmental disclosure. This result is contradictory to the previously proposed theory that with a higher leverage, a company would attempt to report better environmental disclosure. This shows that in performing environmental management activities, leverage is not the only consideration the management takes. That the Government obligates companies to perform environmental management has companies keeping their environmental performance enhanced even with low leverage. This result is consistent with the research conducted by Sari and Ulupui (2014). Leverage constitutes comparison between funds used for company's financing, which means that such debt is not used for financing environmental performance improvement activities (Sari and Ulupui, 2014).
The hypotheses test results show that environmental performance significantly influences environmental disclosure. This shows a positive relationship with estimated parameter value of 0.302. This means that every one unit of environmental performance increment will enhance environmental disclosure for 0.302 unit. This result is in line with the previously explained theory. The signaling theory states that a company with good performance makes more disclosures. This is considered as signal by the company for the stakeholders that the company operates well. A good environmental performance would encourage the company to disclose information to the stakeholders, with an expectation that it will be a signal of "good news". This signal would enhance the company's value in front of the stakeholders.
Ahmadi and Bouri (2017) explain that a company which applies healthy environmental policy tends to be motivated to voluntarily disclose its environmental information to inform investors of its global environmental strategy. The voluntary disclosure theory predicts that a company with better environmental performance provides superior environmental disclosure both in quantity and quality. This result is consistent with the research conducted by He and Loftus (2014) and Yendrawati and Tarusnawati (2013). This result is in line with the ideas proposed by (Yanto Heri et al., 2017a) that the PROPER project may also be viewed as a program to generate environmental information to be presented to the stakeholders.
The hypotheses test results show that company size positively, significantly influences environmental disclosure with estimated parameter value of 0.219. This means that every one unit of company size increment will enhance environmental disclosure for 0.219 unit. This result is in line with the previously explained theory. Based on the legitimacy theory, a company attempt to fulfill the community's expectation so as not to create legitimacy gap. A bigger company would get more attention from the community. This would encourage the company to keep its environmental responsibility by disclosing information in its annual report. In addition, Susanto and Lukito (2013) find that a bigger company has a good reporting system and resources to generate more information. This result is in line with the research conducted by Aulia and Agustina (2015), Sulaiman et al. (2014), and Yanto Heri and Muzzammil (2016) which show that the company size significantly influences environmental disclosure.
The hypotheses test results show that leverage does not significantly influence environmental disclosure. This result is contradictory to the previous theory that higher leverage would encourage a company to make more disclosures. Company could take various considerations in disclosing its environment information, not only based on leverage. The Government's regulation which obligates companies to make environmental disclosure and pressures from other stakeholders may become the main reason for managers to make environmental disclosure. This result is consistent with the research conducted by Aulia and Agustina (2015). Moreover, they also explain that in making environmental disclosure, company's management is not merely influenced by stakeholders who have control over the company. Based on the positive accounting theory, it is found that company's decision making is also influenced by management's self-interest.
The Government of Indonesia has provided guidance to the companies for the implementation of PROPER as their environmental responsibility (Yanto Heri et al., 2017a). However, the PROPER implementation has just achieved blue rating, which means that this program has been well implemented, but needs improvement in order to achieve higher rating. In addition, the environmental information disclosure has not been maximally performed by the companies. The Government and the community as the most important stakeholders need to impose more pressure to industrial companies to implement the PROPER and to more comprehensively report it to them.

Conclusion
The manufacturing companies in Indonesia have obligation to participate in PROPER in order to be responsible for the environmental degradations the made. Meanwhile, the PROPER implementation is good-averagely rated 3 or blue. The manufacturing companies' responsibility to include environmental information in their annual report is not satisfactory yet (38%). Environmental disclosure is influenced by PROPER and Company Size, while PROPER is influenced by profitability and Company Size. Besides, company size positively influences profitability. Leverage does not influence environmental disclosure, environmental performance, and profitability.
The Government as the regulator is expected to make environmental disclosure obligatory to the companies in order to enhance their compliance with regulations and proper manuals. Further research needs to utilize more specific indicators to measure environmental disclosure. Future research also should focus on identifying the strategies for improving PROPER implementation among Indonesian manufacturing companies. These strategies would be very pivotal to improve PROPER rating.