Does poor ESG performance still drive profitability? New evidence from Indonesia’s SRI-KEHATI listed firms

This study investigates the relationship between Environmental, Social, and Governance (ESG) performance and financial outcomes, as measured by Return on Assets (RoA), among publicly SRI-KEHATI listed firms in Indonesia. Utilizing panel data from 90 firm-year observations over six years, the analysis employs a Random Effects Model (REM) across three progressively expanded specifications. ESG performance is proxied by the Sustainalytics ESG Risk Score, with higher values indicating poorer ESG standing. The estimation reveals a consistently positive and statistically significant relationship between ESG risk and financial performance. In the baseline model, the coefficient for ESG is 0.598 with a p-value of 0.052. This effect strengthens in the second model (coefficient = 0.768, p-value = 0.010) and remains significant in the fully controlled model (coefficient = 0.724, p-value = 0.017). These results imply that firms with weaker ESG profiles may achieve higher profitability, particularly in emerging markets with lenient ESG enforcement. Sustainable Growth Rate (SGR) also strongly and positively influences RoA (coefficient = 0.740, p-value = 0.002), underscoring the role of sectoral reinvestment capacity. The findings raise critical questions regarding the alignment between ESG efforts and financial incentives in transition economies. Policymakers are urged to consider stronger regulatory frameworks to realign ESG compliance with firm-level profitability. This study contributes to the literature by providing context-specific insights into the paradox of ESG and financial success in under-regulated markets.