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This is a Quantitative Study study.

October 17, 2025

ESG Governance and Financial Performance: The Role of the Board in Integrating Sustainability into the Strategy of Indonesian Public Companies

Key Points

Board ESG expertise and the intensity of the ESG agenda drive financial performance improvements.
Panel regression analysis indicates that ESG integration significantly enhances return on assets (ROA).
Effective boards lead to strategic ESG integration, resulting in lower costs of equity capital in high-risk industries.
Findings emphasize the importance of aligning board competencies with ESG goals for improved corporate sustainability.

Abstract

This study analyzes how the board's role (structure and process)drives the integration of environmental, social, and governance(ESG) into corporate strategy and its implications for the financialperformance of listed companies listed on the Indonesia StockExchange. Using a panel-based quantitative-empirical design(2019–2025), the study develops an auditable Strategic ESGIntegration Index (ESG-SI)—covering the linkage of ESG targets toplanning & budgeting, green capital allocation, ESG risk recordingin the risk register, ESG KPI linkage to executive remuneration, andassurance data. Key board variables include the proportion ofindependent commissioners, gender diversity, ESG expertise ofboard members, the existence of a sustainability/risk committee,the intensity of the ESG agenda, and board training. Therelationships are tested using panel regression (firm and year fixedeffects), mediation tests (SEM-PLS/bootstrapping), and robusttests (alternative performance proxies, winsorizing, and indexredefinition). The results show that board ESG expertise, theintensity of the ESG agenda, and the relevance of ESG KPIs toremuneration significantly enhance ESG-SI. Furthermore, ESG-SIis positively associated with ROA and lowers the cost of equitycapital (COE), with a stronger effect in high-ESG risk industries.These findings support a mediating mechanism: effective boards→ strategic ESG integration → improved financial performance.The study's key contributions are the clear distinction betweensymbolic disclosure and process-based strategic integration andresource allocation, the measurement of boardcompetencies/processes as drivers of integration, and newevidence from emerging market contexts. Practical implicationsinclude strengthening board ESG competencies, institutionalizingthe ESG agenda, and aligning remuneration with sustainabilitytargets, while policy implications encourage process- and outcomebaseddisclosure.

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ESG Governance and Financial Performance: The Role of the Board in Integrating Sustainability into the Strategy of Indonesian Public Companies

Key Points

Abstract

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