Do Sustainability Activities Affect the Financial Performance of Banks? The Case of Indonesian Banks

Abstract

The disclosure of information on environmental, social, and governance (ESG) risks is increasingly important in financial and banking entities and the evaluation of its impact by supervisors. Therefore, the purpose of this study is to analyze the relationship between sustainability and financial performance in a geographical context that has not been studied. Specifically, this study examines the relationship of environmental, social, and governance (ESG) performance to the financial performance of Indonesian banking companies during the period 2010–20. As a methodology, we used panel data (ESG data from Thomson Reuters), statistical correlations, and regression models. Financial performance was measured by Return on Assets (ROA), Return on Equity (ROE), and Tobin’s Q (TQ). The findings show that ESG is negatively related to all dependent variables (ROA, ROE, and TQ), but each ESG pillar (environmental, social, and governance) yields different results. The social pillar has a significant positive effect on ROA and ROE, governance has a significant negative effect on TQ, and business environment has no significant impact on financial performance. As to the study’s limitations/implications, the findings advance decision makers’ understanding of the quality of organizations’ contributions to improving ESG reporting in financial reporting. The study’s findings on the relationship between ESG reporting and banks’ financial performance also have implications for stakeholders, ESG policymakers, academics, and assurance providers. While the specific research gap addressed is the relationship between ESG and financial performance in Indonesian banking companies, other interesting issues are the voluntary vs. mandatory nature of these reports and the impact of each modality on the variables considered.