Febriana Putri Nur Aziizah, Sunan Fanani

ESG Performance and Firm Value: Evidence from the Indonesian Sharia Stock Index

Introduction

Esg performance and firm value: evidence from the indonesian sharia stock index. ESG and environmental performance negatively impact firm value in Indonesia's Sharia Stock Index (ISSI), indicating suboptimal ESG implementation in Islamic capital markets.

Abstract

This study analyzes the effect of Environmental, Social, and Governance (ESG) on firm value among companies listed in the Indonesia Sharia Stock Index (ISSI) during 2018–2023, both partially and simultaneously. ESG is relevant in Islamic investing as it aligns with the principles of justice, sustainability, and ethical business. Firm value is measured using Tobin’s Q, while ESG is assessed through ESG Score, Environmental, Social, and Governance scores obtained from Bloomberg. The study employs panel data regression using the Random Effect Model, with size and leverage as control variables. The results show that both ESG Score and environmental performance have a significant negative effect on firm value, indicating that better ESG and environmental performance may reduce firm value. Social and governance scores have no significant impact. These findings suggest that ESG implementation in Indonesia remains suboptimal and does not yet reflect the Islamic economic principles of benefit and sustainability. Further research is needed to analyze companies that meet the Sharia Securities List (DES), compare firms with and without ESG practices, and examine specific sectors that may contribute most to the decline in firm value due to ESG. This is crucial for understanding ESG effectiveness in Indonesia's Islamic capital market.

Review

This study makes a timely and relevant contribution by examining the relationship between ESG performance and firm value within the unique context of the Indonesian Sharia Stock Index (ISSI). The researchers appropriately frame ESG as critical to Islamic investing principles, aligning it with concepts of justice and sustainability. Utilizing a robust panel data regression with a Random Effect Model, and employing Tobin's Q for firm value alongside Bloomberg's comprehensive ESG scores, the methodology appears sound for addressing the research question over a recent period (2018-2023). The study's focus on an emerging market with a significant Islamic finance segment adds valuable specificity to the broader ESG literature. The most striking finding is the significant *negative* effect of overall ESG Score and environmental performance on firm value, which stands in stark contrast to much of the global ESG literature and the stated alignment with Islamic principles. While the abstract attributes this to "suboptimal implementation," the full paper would greatly benefit from a deeper exploration into the underlying mechanisms driving this unexpected result. Is it due to the immediate costs of ESG initiatives outweighing long-term benefits in this specific market, a lack of investor awareness, or perhaps issues with the measurement or disclosure quality of ESG data in the Indonesian context? Further, while size and leverage are standard control variables, a more detailed discussion on potential endogeneity issues or alternative model specifications could strengthen the robustness of the findings, especially given the counter-intuitive results. Despite the challenging findings, this research provides crucial insights into the evolving landscape of ESG in emerging Islamic capital markets. It provocatively suggests that simply adopting ESG practices does not automatically translate to enhanced firm value, especially when implementation may not be mature or effectively communicated. The study's call for further research into Sharia Securities List (DES) compliance, comparative analyses with non-ESG firms, and sector-specific examinations is highly pertinent and could unravel the nuanced factors influencing ESG's impact in Indonesia. Ultimately, this paper is a valuable starting point for understanding the complex interplay between ESG, firm value, and Islamic economic principles, highlighting the need for tailored strategies and greater market maturity to fully realize the benefits of sustainable investing in such contexts.

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