ESG and Firm Value in Indonesian Listed Companies: Multiple Mediation Models of Financial Performance

Abstract

Background: Firm value reflects investors’ perceptions of corporate performance but may not fully correspond to a company’s underlying financial condition, creating a potential gap between market valuation and fundamental performance. Environmental, Social, and Governance (ESG) performance has increasingly been associated with financial performance and firm value; however, empirical findings remain inconsistent, particularly in emerging markets such as Indonesia.
Purpose: This study examines the effect of ESG performance on firm value, measured by Tobin’s Q, and investigates whether Return on Assets (ROA) and Return on Equity (ROE) mediate this relationship.
Design/methodology/approach: The study analyzes 80 companies listed on the Indonesia Stock Exchange (IDX) in 2024. The proposed relationships were tested using Partial Least Squares Structural Equation Modeling (PLS-SEM) with WarpPLS 8.0.
Findings/Results: ESG performance has a positive and significant effect on ROA but no significant effect on ROE or firm value. ROA positively and significantly affects firm value, whereas ROE does not. The mediation analysis indicates that neither ROA nor ROE significantly mediates the relationship between ESG performance and firm value at the 5% significance level.
Conclusion: Among the sampled IDX-listed companies in 2024, ESG performance is more strongly associated with operational profitability, as reflected in ROA, than with equity profitability or market valuation. These findings suggest that the financial benefits associated with ESG may not yet be fully reflected in investors’ valuation of Indonesian listed firms.
Originality/value: This study contributes to the ESG literature in emerging markets by distinguishing between the roles of asset-based and equity-based profitability in linking ESG performance to firm value.

Keywords: ESG, Return on Assets (ROA), Return on Equity (ROE), Firm Value, Tobin’s Q