The results show a clear pattern: larger companies command stronger market valuations, while ESG disclosure improves financial performance but does not directly increase firm value. Green investment, meanwhile, shows no significant short-term impact on valuation or profitability during the observation period.
Why This Research Is Relevant Now
Indonesia’s capital market is undergoing a transition toward sustainability. Environmental, Social, and Governance (ESG) standards are increasingly embedded in corporate reporting frameworks, and regulators encourage transparency through sustainability disclosures. Institutional investors are also paying closer attention to climate risk, governance quality, and long-term resilience.
Yet market behavior does not always move in sync with policy momentum. While sustainability reporting has expanded, stock valuations continue to fluctuate across sectors. In the manufacturing industry—one of Indonesia’s largest contributors to GDP—questions remain about whether ESG commitments translate into measurable market value.
The study by Anita Agustiani and her colleagues from Universitas 17 Agustus 1945 Surabaya directly addresses this gap. It evaluates whether sustainability efforts truly influence how investors price companies in the LQ45 index, which represents some of the most liquid and capitalized firms on the IDX.
How the Study Was Conducted
The researchers used a quantitative research design and analyzed secondary data from annual and sustainability reports of LQ45 manufacturing companies between 2019 and 2024.
Out of 45 manufacturing firms in the LQ45 index, 13 food and beverage companies met the criteria for consistent reporting across the six-year period. The study applied Structural Equation Modeling (SEM) using Partial Least Squares (PLS) software to examine both direct and indirect relationships among variables.
In simple terms, the researchers tested whether:
- ESG disclosure affects financial performance and firm value
- Green investment affects financial performance and firm value
- Firm size affects financial performance and firm value
- Financial performance mediates those relationships
Firm value was measured primarily using the Price to Book Value (PBV) ratio, a widely recognized indicator of market valuation.
Key Findings
The findings present a nuanced picture of sustainability and valuation dynamics in Indonesia’s capital market.
First, ESG disclosure has a positive and statistically significant impact on financial performance. Companies that provide more comprehensive environmental, social, and governance reporting tend to show stronger financial results. The statistical test produced a p-value of 0.013, confirming significance.
However, ESG disclosure does not have a significant direct impact on firm value. The market does not yet treat ESG reporting as a primary valuation driver. The p-value of 0.723 indicates no meaningful effect on stock valuation.
Green investment also shows no significant effect on financial performance or firm value within the research period. Although sustainability investments may yield long-term benefits, they do not produce immediate profitability or valuation gains during 2019–2024.
In contrast, firm size demonstrates the strongest and most consistent influence. Larger companies significantly improve both financial performance and firm value. The statistical results show highly significant relationships, with p-values of 0.000 for both effects.
Interestingly, financial performance itself does not significantly influence firm value. This suggests that LQ45 investors may focus more on structural stability, scale, and long-term resilience rather than short-term profitability metrics.
The mediation tests further reveal that financial performance does not act as an intermediary between ESG disclosure, green investment, or firm size and firm value. In other words, sustainability initiatives do not indirectly raise valuation through profitability improvements during the study period.
What This Means for Business and Policy
The research from Universitas 17 Agustus 1945 Surabaya signals that Indonesia’s capital market is still in a transitional phase regarding sustainable finance.
For corporate leaders, the findings highlight a strategic message: ESG reporting strengthens internal financial health but does not automatically increase market valuation. Sustainability must go beyond formal disclosure and demonstrate measurable operational value.
For investors, the study suggests that firm size remains a dominant signal of stability and lower risk. Larger firms benefit from economies of scale, stronger access to funding, and established reputations, which translate directly into higher valuations.
For policymakers, the results indicate that regulatory encouragement alone may not be sufficient to shift investor perception. Clearer communication of the long-term financial benefits of sustainability initiatives may be needed to align market incentives with environmental goals.
Anita Agustiani and her co-authors from Universitas 17 Agustus 1945 Surabaya emphasize that ESG disclosure should not be treated as a “tick-box” compliance exercise. Companies must improve transparency, consider independent verification of sustainability reports, and clearly communicate the economic value of green investment to stakeholders.
Academic Perspective
According to Anita Agustiani, S.E., M.M., from Universitas 17 Agustus 1945 Surabaya, the findings show that “larger companies signal stability and lower risk directly to investors, which strengthens market valuation more clearly than short-term profitability or sustainability disclosures.”
Dr. Mulyanto Nugroho, S.E., M.M., and Nekky Rahmiyati, S.E., M.M., also from Universitas 17 Agustus 1945 Surabaya, note that sustainability practices must generate tangible operational benefits if they are to influence valuation outcomes.
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