Analysis of Environmental, Social, and Governance Performance in Indonesia: Role of ESG on Corporate Performance

Abstract

Issues regarding environmental, social, and governance have a positive role in corporate performance, especially in developed countries. Unlike accounting performance which only considers business performance, the ESG score reflects long-term performance because it considers environmental, social, and governance factors. Firms in Indonesia cannot improve their ESG score due to the limited resource and shareholders' reactions. This study compares the investment performance between the top 9 ESG constituents and the LQ45 index. Further, this study examines the impact of the ESG score on financial performance. This research used non-financial companies listed on Indonesia Stock Exchange as a sample. Modified Sharpe ratio and panel data regression were used as a method. The result showed that the ESG portfolio has a better Sharpe ratio than LQ45. However, the regression shows a negative effect on the ESG score on financial performance. Increasing the ESG score decreases financial performance because it requires higher investment and opportunity costs. This study has several recommendations related to implementing ESG at the corporate level.