ESG DIMENSIONS AND CORPORATE PERFORMANCE – FINANCIAL SLACK AS A MODERATING VARIABLE: EVIDENCE FROM EMERGING MARKETS
Main Article Content
Aulia Rayendra Rahman
Nur Dhani Hendranastiti
This paper analyzes the effects of Environmental, Social, and Governance (ESG) factors, including their three pillars and ESG controversies, on corporate performance in environmentally sensitive industries across ASEAN countries. ESG issues have gained prominence due to their association with environmental degradation, labor exploitation, and lack of transparency, all of which pose risks to corporate sustainability. In emerging markets, the implementation of ESG practices faces challenges such as inadequate infrastructure and financial limitations, which may hinder companies from adopting sustainable practices and improving performance. This study addresses these challenges by introducing financial slack as a moderating variable, aiming to determine if financial flexibility impacts the relationship between ESG engagement and corporate performance, assessed through Return on Equity (ROE), Return on Assets (ROA), and Tobin's Q. Utilizing panel data from 2019 to 2023 and applying moderated regression analysis reveals that ESG engagement and its pillars are negatively linked to corporate performance. Furthermore, financial slack mitigates the negative outcome of overall ESG engagement, along with the Environmental and Governance pillars, on these performance indicators. These findings highlight the importance of financial flexibility in supporting ESG implementation in emerging economies and environmentally sensitive industries.
Alareeni, B. A., & Hamdan, A. (2020). ESG impact on performance of US S&P 500-listed firms. Corporate Governance: The International Journal of Business in Society, 20(7), 1409–1428. https://doi.org/10.1108/CG-06-2020-0258
Agnese, P., Cerciello, M., Oriani, R., & Taddeo, S. (2024). ESG controversies and profitability in the European banking sector. Finance Research Letters, 61, 105042. https://doi.org/10.1016/j.frl.2023.105042
Alfalih, A. A. (2023). ESG disclosure practices and financial performance: A general and sector analysis of S&P-500 non-financial companies and the moderating effect of economic conditions. Journal of Sustainable Finance & Investment, 13(4), 1506–1533. https://doi.org/10.1080/20430795.2023.2177749
Antara News. (2016, October 1). Deepwater Horizon: Bencana tumpahan minyak terbesar Amerika. Antaranews. https://www.antaranews.com/berita/587760/deepwater-horizon-bencana-tumpahan-minyak-terbesar-amerika
Arif, A. (2024, July 6). Citra satelit mengungkap, 700.000 hektar hutan di Indonesia telah ditebang untuk tambang. Kompas.id. https://www.kompas.id/baca/humaniora/2024/07/06/citra-satelit-mengungkap-700000-hektar-hutan-di-indonesia-telah-ditebang-untuk-tambang
Aydoğmuş, M., Gülay, G., & Ergun, K. (2022). Impact of ESG performance on firm value and profitability. Borsa Istanbul Review, 22, S119–S127. https://doi.org/10.1016/j.bir.2022.01.001
Banerjee, S., & David, R. (2024). Does ESG really matter? Accessing the relevance of ESG in Indian investors’ decision-making dynamics. Qualitative Research in Financial Markets. Advance online publication. https://doi.org/10.1108/QRFM-11-2023-0223
Bourgeois, L. J. III. (1981). On the measurement of organizational slack. Academy of Management Review, 6(1), 29–39. https://doi.org/10.5465/amr.1981.4287985
Bruna, M. G., Loprevite, S., Raucci, D., Ricca, B., & Rupo, D. (2022). Investigating the marginal impact of ESG results on corporate financial performance. Finance Research Letters, 47, 102828. https://doi.org/10.1016/j.frl.2022.102828
Buallay, A. (2019). Is sustainability reporting (ESG) associated with performance? Evidence from the European banking sector. Management of Environmental Quality: An International Journal, 30(1), 98–115. https://doi.org/10.1108/MEQ-12-2017-0149
Chandrasekaran, M. M. (2022). Does corporate social responsibility fuel firm performance? Evidence from the Asian automotive sector. Sustainability, 14(22), 15440. https://doi.org/10.3390/su142215440
Chen, S., Song, Y., & Gao, P. (2023). Environmental, social, and governance (ESG) performance and financial outcomes: Analyzing the impact of ESG on financial performance. Journal of Environmental Management, 345, 118829. https://doi.org/10.1016/j.jenvman.2023.118829
Chen, Z., & Xie, G. (2022). ESG disclosure and financial performance: Moderating role of ESG investors. International Review of Financial Analysis, 83, 102291. https://doi.org/10.1016/j.irfa.2022.102291
Chung, K. H., & Pruitt, S. W. (1994). A simple approximation of Tobin’s Q. Financial Management, 23(3), 70–74. https://doi.org/10.2307/3665623
Cyert, R., & March, J. (2015). Behavioral theory of the firm. In Organizational behavior 2 (pp. 60–77). Routledge.
Diab, A., & Adams, G. M. (2021). ESG assets may hit $53 trillion by 2025, a third of global AUM. Bloomberg Intelligence, 23.
Duque-Grisales, E., & Aguilera-Caracuel, J. (2021). Environmental, social and governance (ESG) scores and financial performance of multilatinas: Moderating effects of geographic international diversification and financial slack. Journal of Business Ethics, 168(2), 315–334. https://doi.org/10.1007/s10551-019-04177-w
Edmans, A. (2023). The end of ESG. Financial Management, 52(1), 3–17. https://doi.org/10.1111/fima.12420
Environmental, social and governance scores from Refinitiv. (2022). Refinitiv. https://www.lseg.com/content/dam/marketing/en_us/documents/methodology/refinitiv-esg-scores-methodology.pdf
Freeman, R. E. (1984). Strategic management: A stakeholder approach. Boston: Pitman
Gao, S., Meng, F., Wang, W., & Chen, W. (2023). Does ESG always improve corporate performance? Evidence from firm life cycle perspective. Frontiers in Environmental Science, 11, 1105077. https://doi.org/10.3389/fenvs.2023.1105077
Garcia, A. S., Mendes-Da-Silva, W., & Orsato, R. J. (2017). Sensitive industries produce better ESG performance: Evidence from emerging markets. Journal of Cleaner Production, 150, 135–147. https://doi.org/10.1016/j.jclepro.2017.02.180
Ghozali, I. (2016). Aplikasi analisis multivariete dengan program (IBM SPSS) (Edisi ke-8). Badan Penerbit Universitas Diponegoro.
Gutiérrez‐Ponce, H., & Wibowo, S. A. (2024). Do sustainability practices contribute to the financial performance of banks? An analysis of banks in Southeast Asia. Corporate Social Responsibility and Environmental Management, 31(2), 1418–1432. https://doi.org/10.1002/csr.2634
Hart, O., & Zingales, L. (2017). Companies should maximize shareholder welfare, not market value. Journal of Law, Finance and Accounting, 2(2), 247–275. https://doi.org/10.1561/108.00000022
Hassan, S. (2024). The impact of environmental, social, and governance on firm performance: Moderating role of financial slack and research & development intensity. City University Research Journal, 14(1), 24–38.
Henderson, D. (2001). Misguided virtue: False notions of corporate social responsibility. Institute of Economic Affairs. https://iea.org.uk/wp-content/uploads/2016/07/upldrelease5pdf.pdf
Heubeck, T., & Ahrens, A. (2024). Governing the responsible investment of slack resources in environmental, social, and governance (ESG) performance: How beneficial are CSR committees? Journal of Business Ethics, 1–21. https://doi.org/10.1007/s10551-024-05694-0
Jucá, M. N., Muren, P. D., Valentinčič, A., & Ichev, R. (2024). The impact of ESG controversies on the financial performance of firms: An analysis of industry and country clusters. Borsa Istanbul Review, 24(6), 1305–1315. https://doi.org/10.1016/j.bir.2024.04.006
Khoury, R., Nasrallah, N., & Alareeni, B. (2023). ESG and financial performance of banks in the MENAT region: Concavity–convexity patterns. Journal of Sustainable Finance & Investment, 13(1), 406–430. https://doi.org/10.1080/20430795.2022.2034321
Lamech, R., & Saeed, K. (2003). What international investors look for when investing in developing countries. Energy and Mining Sector Board Discussion Paper, 6. https://documents.worldbank.org/en/publication/documents-reports/documentdetail/860541468739447413/what-international-investors-look-for-when-investing-in-developing-countries-results-from-a-survey-of-international-investors-in-the-power-sector
Lavin, J. F., & Montecinos-Pearce, A. A. (2021). ESG disclosure in an emerging market: An empirical analysis of the influence of board characteristics and ownership structure. Sustainability, 13(19), 10498. https://doi.org/10.3390/su131910498
Mahajan, R., Lim, W. M., Sareen, M., Kumar, S., & Panwar, R. (2023). Stakeholder theory. Journal of Business Research, 166, 114104. https://doi.org/10.1016/j.jbusres.2023.114104
Market Research Southeast Asia. (2022). The new ASEAN consumer. Jurnal.
Manurung, B., & Bratajaya, Y. (2022, March 14). Let’s focus on the ‘S’ in ESG to improve social outcomes. The Jakarta Post. https://www.thejakartapost.com/opinion/2022/03/14/lets-focus-on-the-s-in-esg-to-improve-social-outcomes.html
Menicucci, E., & Paolucci, G. (2023). ESG dimensions and bank performance: An empirical investigation in Italy. Corporate Governance: The International Journal of Business in Society, 23(3), 563–586. https://doi.org/10.1108/CG-01-2022-0031
Mohammad, W. M. W., & Wasiuzzaman, S. (2021). Environmental, social, and governance (ESG) disclosure, competitive advantage, and performance of firms in Malaysia. Cleaner Environmental Systems, 2, 100015. https://doi.org/10.1016/j.cesys.2021.100015
Moses, O. D. (1992). Organizational slack and risk-taking behavior: Tests of product pricing strategy. Journal of Organizational Change Management, 5(3), 38–54. https://doi.org/10.1108/09534819210014486
MSCI. (2023). MSCI ESG controversies and global norms methodology. https://www.msci.com/documents/1296102/14524248/ESG-Research-Controversies-Methodology.pdf
Mu, H. L., Xu, J., & Chen, S. (2024). The impact of corporate social responsibility types on happiness management: A stakeholder theory perspective. Management Decision, 62(2), 591–613. https://doi.org/10.1108/MD-11-2022-1559
Naeem, N., Cankaya, S., & Bildik, R. (2022). Does ESG performance affect the financial performance of environmentally sensitive industries? A comparison between emerging and developed markets. Borsa Istanbul Review, 22, S128–S140. https://doi.org/10.1016/j.bir.2022.06.002
Nareswari, N., Tarczyńska-Łuniewska, M., & Al Hashfi, R. U. (2023). Analysis of environmental, social, and governance performance in Indonesia: Role of ESG on corporate performance. Procedia Computer Science, 225, 1748–1756. https://doi.org/10.1016/j.procs.2023.01.337
Penrose, E. T. (1959). The theory of the growth of the firm. Wiley.
Pinheiro, A. B., dos Santos, J. I. A. S., Cherobim, A. P. M. S., & Segatto, A. P. (2023). What drives environmental, social, and governance (ESG) performance? The role of institutional quality. Management of Environmental Quality: An International Journal, 35(2), 427–444. https://doi.org/10.1108/MEQ-01-2023-0021
Pursiainen, V., Sun, H., & Xiang, Y. (2023). Competitive pressure and ESG. Swiss Finance Institute Research Paper, (23-69). https://doi.org/10.2139/ssrn.4543124
Qureshi, M. A., Akbar, M., Akbar, A., & Poulova, P. (2021). Do ESG endeavors assist firms in achieving superior financial performance? A case of 100 best corporate citizens. Sage Open, 11(2), 21582440211021598. https://doi.org/10.1177/21582440211021598
Rahat, B., & Nguyen, P. (2024). The impact of ESG profile on firm's valuation in emerging markets. International Review of Financial Analysis, 103361. https://doi.org/10.1016/j.irfa.2024.103361
Ramírez-Orellana, A., Martínez-Victoria, M., García-Amate, A., & Rojo-Ramírez, A. A. (2023). Is the corporate financial strategy in the oil and gas sector affected by ESG dimensions? Resources Policy, 81, 103303. https://doi.org/10.1016/j.resourpol.2023.103303
Rao, A., Dagar, V., Sohag, K., Dagher, L., & Tanin, T. I. (2023). Good for the planet, good for the wallet: The ESG impact on financial performance in India. Finance Research Letters, 56, 104093. https://doi.org/10.1016/j.frl.2023.104093
Saini, M., Aggarwal, V., Dhingra, B., Kumar, P., & Yadav, M. (2023). ESG and financial variables: A systematic review. International Journal of Law and Management, 65(6), 663–682. https://doi.org/10.1108/IJLMA-02-2023-0037
Singh, A., Verma, S., & Shome, S. (2023). ESG-CFP relationship: Exploring the moderating role of financial slack. International Journal of Emerging Markets. https://doi.org/10.1108/IJOEM-10-2022-1614
Steen, P., Rhodes, A., Carslaw, E., & Cornaglia, M. (2023). Investing in their best interests: Considerations for trustees from the rise of ESG. Trusts & Trustees, 29(8), 698–708. https://doi.org/10.1093/tandt/ttad094
Tanhati, S. (2025, Januari 15). Bagaimana keserakahan manusia pada minyak kelapa sawit merusak hutan? National Geographic Indonesia. https://nationalgeographic.grid.id/read/134204727/bagaimana-keserakahan-manusia-pada-minyak-kelapa-sawit-merusak-hutan?page=all
Ting, I. W. K., Azizan, N. A., Bhaskaran, R. K., & Sukumaran, S. K. (2019). Corporate social performance and firm performance: Comparative study among developed and emerging market firms. Sustainability, 12(1), 26. https://doi.org/10.3390/su12010026
Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, 1(1), 15–29
Uyar, A., Lodh, S., Nandy, M., Kuzey, C., & Karaman, A. S. (2023). Tradeoff between corporate investment and CSR: The moderating effect of financial slack, workforce slack, and board gender diversity. International Review of Financial Analysis, 87, 102649. https://doi.org/10.1016/j.irfa.2023.102649
Waluyo, D. (2024, November 21). Ribuan hektare lahan sawit rusak habitat gajah, konflik dengan manusia marak. Katadata.co.id. https://katadata.co.id/ekonomi-hijau/ekonomi-sirkular/673eded926875/ribuan-hektare-lahan-sawit-rusak-habitat-gajah-konflik-dengan-manusia-marak
