The Role of Environmental, Social and Governance Engagement in Enhancing Corporate Financial Performance
DOI:
https://doi.org/10.59890/ijir.v4i10.9Keywords:
ESG Disclosure, Sustainability, Financial Performance, Tobin's Q, Cost of DebtAbstract
Unlike most previous similar studies based in Europe and the USA, this study was conducted in a developing country, namely Indonesia. The objective of this study was to identify, analyze, and test the strength of the relationship between Environmental, Social, and Governance Disclosure (ESG) and the financial performance of corporations listed on the Indonesia Stock Exchange (IDX) during 2018–2024, with a total observation of 147 companies. The secondary data source for this study came from Bloomberg. Furthermore, eViews 13 was used to obtain statistical descriptions and also to analyze and test all hypotheses based on panel data regression analysis methods.
The research results indicate and can be concluded that corporations with better ESG performance will also have better financial performance (ROI) and market performance (Tobin's Q). Furthermore, the research analysis indicates and demonstrates that in financial markets, creditors pay attention to and consider ESG when determining credit decisions (cost of debt).
This research is relevant to the emerging issue of corporate sustainability. The results are also important for managers in prioritizing resources for allocating ESG activities, the outcomes of which determine corporate performance
References
Al Amosh, H., Khatib, S. F. A., & Ananzeh, H. (2023). Environmental, social and governance impact on financial performance: Evidence from the Levant countries. Corporate Governance: The International Journal of Business in Society, 23(3), 493–513. https://doi.org/10.1108/CG-03-2022-0105
Al Barrak, T., Chebbi, K., Aljughaiman, A. A., & Albarrak, M. (2023). Exploring the interplay between sustainability and debt costs in an emerging market: Does financial distress matter? Sustainability, 15(12), Article 9273. https://doi.org/10.3390/su15129273
Alshehhi, A., Nobanee, H., & Khare, N. (2018). The impact of sustainability practices on corporate financial performance: Literature trends and future research potential. Sustainability, 10(2), 494. https://doi.org/10.3390/su10020494
Arellano, M. (1987). Computing robust standard errors for within-groups estimators. Oxford Bulletin of Economics and Statistics, 49(4), 431–434. https://doi.org/10.1111/j.1468-0084.1987.mp49004006.x
Bamel, N., Khatri, K., Bamel, U., & Kumar, S. (2025). ESG Disclosure and firm performance in global south economy: Does industry profile and board independence moderate the relationship. International Review of Economics & Finance, 100, 104093. https://doi.org/10.1016/j.iref.2025.104093
Brigham, E. F., & Houston, J. F. (2019). Fundamentals of financial management (15th ed.). Cengage Learning.
Carnini Pulino, S., Ciaburri, M., Magnanelli, B. S., & Nasta, L. (2022). Does ESG disclosure influence firm performance? Sustainability, 14(13), Article 7595. https://doi.org/10.3390/su14137595
Cheng, B., Ioannou, I., & Serafeim, G. (2014). Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), 1–23. https://doi.org/10.1002/smj.2131
Darsono, D., Ratmono, D., Tujori, A., & Clarisa, T. Y. (2025). The relationship between ESG, financial performance, and Cost of Debt: The role of independent assurance. Cogent Business & Management, 12(1), 2437137. https://doi.org/10.1080/23311975.2024.2437137
de Villiers, C., Naiker, V., & van Staden, C. J. (2011). The effect of board characteristics on firm environmental performance. Journal of Management, 37(6), 1636–1663. https://doi.org/10.1177/0149206311411506
Drukker, D. M. (2003). Testing for serial correlation in linear panel-data models. The Stata Journal, 3(2), 168–177. https://doi.org/10.1177/1536867X0300300206
Durbin, J., & Watson, G. S. (1951). Testing for serial correlation in least squares regression: II. Biometrika, 38(1–2), 159–178. https://doi.org/10.1093/biomet/38.1-2.159
Eliwa, Y., Aboud, A., & Saleh, A. (2021). ESG practices and the Cost of Debt: Evidence from EU countries. Critical Perspectives on Accounting, 79, 102097. https://doi.org/10.1016/j.cpa.2019.102097
Freeman, R. E. (1984). Strategic management: A stakeholder approach. Pitman.
Firas, R., & Kuncoro, A. R. (2026). Effects of real earnings management and ESG Disclosure on the Cost of Debt with political connections as a moderating variable: Evidence from listed firms in Indonesia. KEUNIS, 14(1), 93–104. https://doi.org/10.32497/keunis.v14i1.6562
Friske, W., Hoelscher, S. A., & Nikolov, A. N. (2023). The impact of voluntary sustainability reporting on firm value: Insights from signaling theory. Journal of the Academy of Marketing Science, 51, 372–392. https://doi.org/10.1007/s11747-022-00879-2
Ghasemi, A., & Zahediasl, S. (2012). Normality tests for statistical analysis: A guide for non-statisticians. International Journal of Endocrinology and Metabolism, 10(2), 486–489. https://doi.org/10.5812/ijem.3505
Ghozali, I. (2018). Multivariate analysis application with IBM SPSS 25 program (9th Edition). Diponegoro University Publishing Agency.
Global Reporting Initiative. (2016). GRI sustainability reporting standards. Global Reporting Initiative.
Gracia, O., & Siregar, S. V. (2021). Sustainability practices and the Cost of Debt: Evidence from ASEAN countries. Journal of Cleaner Production, 300, 126942. https://doi.org/10.1016/j.jclepro.2021.126942
Gujarati, D. N., & Porter, D. C. (2009). Basic econometrics (5th ed.). McGraw-Hill/Irwin.
Hamrouni, A., Boussaada, R., & Ben Farhat Toumi, N. (2019). Corporate social responsibility disclosure and debt financing. Journal of Applied Accounting Research, 20(4), 394–415. https://doi.org/10.1108/JAAR-01-2018-0020
Hansen, J. D., & Xie, Z. (2025). Transitioning to sustainability: The impact of ESG on financial performance in the Post-Soviet EU States. International Journal of Economics and Financial Issues, 15(2), 113–131. https://doi.org/10.32479/ijefi.17888
Hery. (2015). Analisis laporan keuangan. Center for Academic Publishing Service (CAPS).
Hirdinis, M. (2019). Capital structure and firm size on firm value moderated by profitability. International Journal of Economics and Business Administration, 7(1), 174–191. https://doi.org/10.35808/ijeba/204
Iyer, G. R., & Jarvis, L. (2019). CSR adoption in the multinational hospitality context: A review of representative research and avenues for future research. International Journal of Contemporary Hospitality Management, 31(6), 2376–2393. https://doi.org/10.1108/IJCHM-06-2018-0451
Jafar, R., Basuki, Windijarto, Setiawan, R., & Prabaswara, A. (2024). Does environmental, social, and governance (ESG) disclosure matter for creditor? Empirical evidence from Indonesia. International Journal of Sustainable Development and Planning, 19(11), 4377–4387. https://doi.org/10.18280/ijsdp.191125
Jarque, C. M., & Bera, A. K. (1987). A test for normality of observations and regression residuals. International Statistical Review, 55(2), 163–172. https://doi.org/10.2307/1403192
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305–360. https://doi.org/10.1016/0304-405X(76)90026-X
Kasmir. (2019). Analisis laporan keuangan. PT RajaGrafindo Persada.
Khandelwal, V., Sharma, P., & Chotia, V. (2023). ESG disclosure and firm performance: An asset-pricing approach. Risks, 11(6), 112. https://doi.org/10.3390/risks11060112
Li, T.-T., Wang, K., Sueyoshi, T., & Wang, D. D. (2021). ESG: Research progress and future prospects. Sustainability, 13(21), Article 11663. https://doi.org/10.3390/su132111663
Lumley, T., Diehr, P., Emerson, S., & Chen, L. (2002). The importance of the normality assumption in large public health data sets. Annual Review of Public Health, 23, 151–169. https://doi.org/10.1146/annurev.publhealth.23.100901.140546
Maji, S. G., & Lohia, P. (2023). Environmental, social and governance (ESG) performance and firm performance in India. Society and Business Review, 18(1), 175–194. https://doi.org/10.1108/SBR-06-2022-0162
Malik, N., & Kashiramka, S. (2024). Impact of ESG Disclosure on firm performance and Cost of Debt: Empirical evidence from India. Journal of Cleaner Production, 448, 141582. https://doi.org/10.1016/j.jclepro.2024.141582
Nekhili, M., Nagati, H., Chtioui, T., & Rebolledo, C. (2017). Corporate social responsibility disclosure and market value: Family versus nonfamily firms. Journal of Business Research, 77, 41–52. https://doi.org/10.1016/j.jbusres.2017.04.001
Nguyen, H. T. T. (2026). ESG Disclosure and firm performance: Evidence from the Vietnam Sustainability Index. International Journal of Knowledge and Systems Science, 17(1), 1–17. https://doi.org/10.4018/IJKSS.402013
Nursan, AM (2025). Textbook of panel data regression analysis with EViews application. Pustaka Bangsa.
O'Brien, R. M. (2007). A caution regarding rules of thumb for variance inflation factors. Quality & Quantity, 41(5), 673–690. https://doi.org/10.1007/s11135-006-9018-6
Oh, W. Y., Chang, Y. K., & Martynov, A. (2011). The effect of ownership structure on corporate social responsibility: Empirical evidence from Korea. Journal of Business Ethics, 104(2), 283–297. https://doi.org/10.1007/s10551-011-0912-z
Organisation for Economic Co-operation and Development. (2020). OECD business and finance outlook 2020: Sustainable and resilient finance. OECD Publishing. https://doi.org/10.1787/eb61fd29-en
Financial Services Authority. (2017). Financial Services Authority Regulation Number 51/POJK.03/2017 concerning the implementation of sustainable finance for financial services institutions, issuers, and public companies.
Financial Services Authority. (2021). Sustainable finance roadmap phase II (2021–2025).
Sartono, A. (2000). Financial management: Theory and application. BPFE.
Sudana, IM (2019). Corporate financial management: Theory and practice. Erlangga.
Sutrisno. (2009). Financial management: Theory, concepts, and applications. Faculty of Economics, UII Yogyakarta Campus.
Tjahjono, MES (2013). The influence of environmental performance on company value and financial performance. Journal of Economics, 4(1), 38–46.
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1), 15–29. https://doi.org/10.2307/1991374
Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data (2nd ed.). MIT Press.
Wooldridge, J. M. (2020). Introductory econometrics: A modern approach (7th ed.). Cengage Learning.
Xu, E. G., Graves, C., Shan, Y. G., & Yang, J. W. (2022). The mediating role of corporate social responsibility in corporate governance and firm performance. Journal of Cleaner Production, 375, Article 134165. https://doi.org/10.1016/j.jclepro.2022.134165
Yolanda, A. M. W., Darmawati, Hamzah, B., & Herdiyana, A. R. A. (2026). ESG Disclosure and firm performance: Evidence on profitability, market value, and Cost of Debt from Indonesia. Fundamental and Applied Management Journal, 4(1), 158–172. https://doi.org/10.66314/famj.v4i1.635
Yani, DF, Aryani, YA, & Sumarta, NH (2024). Sustainability reporting in Indonesia and its disclosure in the corporate environment: A systematic literature review. Owner: Research & Accounting Journal, 8(3), 2103–2115. https://doi.org/10.33395/owner.v8i3.2280
You, X., Chen, C., Peng, K., & Li, Y. (2025). ESG disclosure quality and cost of debt. Emerging Markets Review, 64, 101219. https://doi.org/10.1016/j.ememar.2024.101219
Zhang, Z., Zhang, B., You, J., Wang, N., & Xu, X. (2026). Is more ESG Disclosure always better? New evidence from ESG Disclosure quantity and firm value. International Review of Economics & Finance, 108, 105318. https://doi.org/10.1016/j.iref.2026.105318
