This study investigates the impact of green taxation and firm-level characteristics on Environmental, Social, and Governance (ESG) performance in Indonesian firms, with particular attention to the mediating roles of profitability, leverage, and firm size. Drawing on institutional theory, slack resources theory, and the Porter Hypothesis, green taxation is expected to incentivize sustainability practices by internalizing environmental externalities and stimulating innovation. Similarly, firm-level attributes are hypothesized to shape ESG outcomes by influencing available resources and managerial discretion. Using data from publicly listed firms in Indonesia, the analysis reveals that green taxation does not exert a significant direct or indirect effect on ESG performance. Likewise, profitability, leverage, and firm size fail to demonstrate meaningful influence, and the proposed mediating mechanisms are largely unsupported. These findings suggest that regulatory pressure alone may be insufficient to drive sustainability engagement in emerging market contexts characterized by enforcement limitations, high compliance costs, and varying managerial capacities. The study highlights the importance of contextualizing theoretical frameworks within Indonesia’s institutional and market realities, emphasizing that fiscal instruments must be complemented by capacity-building, innovation incentives, and governance mechanisms that facilitate effective ESG integration. Policy implications include the need for tailored support for firms to transform environmental compliance into competitive advantage, particularly in resource-intensive or highly regulated sectors. Managerial implications underscore that structural characteristics alone are inadequate to ensure sustainability commitment, and strategic integration of ESG initiatives with organizational goals is essential. By addressing both theoretical and practical gaps, this research contributes to a deeper understanding of the complex interplay between regulatory instruments, firm characteristics, and ESG performance in emerging economies, providing guidance for policymakers, managers, and future researchers aiming to enhance corporate sustainability in Indonesia.
Herianti et al. (Sun,) studied this question.