The findings arrive at a time when environmental, social, and governance (ESG) reporting is becoming increasingly important for investors, regulators, and consumers worldwide. As governments strengthen sustainability regulations and financial markets place greater emphasis on corporate responsibility, businesses face growing pressure to demonstrate not only environmental compliance but also genuine commitment to sustainable operations.
According to the researchers, environmental disclosure is no longer merely a reporting obligation. It has become a strategic business tool that can influence investor confidence, stakeholder trust, and ultimately financial outcomes.
Why Environmental Disclosure Matters
Environmental disclosure refers to the information companies provide about their environmental activities and impacts. This can include greenhouse gas emissions, energy consumption, water usage, waste management, biodiversity protection, and environmental management systems.
In Indonesia, environmental reporting has gained prominence through sustainability reporting requirements and government environmental assessment programs such as PROPER. Investors increasingly use environmental information to evaluate corporate risk, long-term resilience, and governance quality.
Despite these developments, environmental reporting practices vary significantly among companies. Some organizations provide comprehensive sustainability reports aligned with international standards, while others disclose only limited information.
The study by Cheng-Wen Lee and Avi Sunani examined whether higher-quality environmental disclosure is associated with better financial performance among publicly listed manufacturing firms.
Examining 85 Indonesian Manufacturing Companies
The research analyzed 85 manufacturing companies listed on the Indonesia Stock Exchange (IDX) over a five-year period from 2020 to 2024. The sample covered environmentally sensitive industries, including:
- Chemical manufacturing
- Automotive manufacturing
- Metal fabrication
- Textile production
- Food processing
The researchers collected information from annual reports, sustainability reports, environmental certifications, and stock market records. In total, the study examined 425 firm-year observations, providing a broad picture of environmental reporting practices across Indonesia’s manufacturing sector.
Environmental disclosure was measured using 18 indicators aligned with internationally recognized Global Reporting Initiative (GRI) standards, including emissions reporting, environmental management systems, energy efficiency initiatives, water management, and biodiversity protection.
Financial performance was measured using Return on Assets (ROA), a widely used indicator of profitability that evaluates how effectively a company generates earnings from its assets.
Environmental Transparency Correlates With Better Financial Performance
One of the most significant findings is that environmental disclosure has a strong positive relationship with financial performance.
The study found that companies with higher environmental disclosure scores generally reported higher ROA levels. Statistical analysis showed a significant positive association between environmental disclosure and profitability.
The researchers reported that a one-point increase in environmental disclosure quality was associated with a substantial increase in financial performance, even after accounting for other factors such as company size, leverage, board independence, audit committee activity, and innovation spending.
According to the study, several mechanisms explain this relationship:
- Reduced information asymmetry between companies and investors
- Increased stakeholder trust
- Improved corporate legitimacy
- Lower perceived business risk
- Better access to investment capital
The researchers argue that transparency helps external stakeholders understand a firm's environmental commitment, making the company appear more reliable and reducing uncertainty in financial markets.
Green Innovation Delivers the Strongest Financial Benefits
While environmental disclosure was positively linked to profitability, the study identified another factor with an even stronger effect: green innovation investment.
Green innovation intensity—measured through environmentally focused research and development spending—showed the strongest positive association with financial performance among all variables examined.
This finding suggests that environmental reporting alone is not enough. Companies that combine transparency with tangible investments in environmentally friendly technologies achieve the greatest financial benefits.
The researchers explain that green technologies can improve operational efficiency by reducing energy consumption, minimizing waste, lowering regulatory risks, and creating opportunities for environmentally conscious products and services.
As Avi Sunani and Cheng-Wen Lee note, environmental disclosure becomes most effective when supported by genuine environmental improvements and technological innovation rather than serving solely as a communication exercise.
Chemical and Automotive Industries Benefit the Most
The study also revealed important differences among manufacturing sectors.
Environmental disclosure generated the strongest financial impact in:
- Chemical manufacturing
- Automotive manufacturing
- Metal fabrication
In contrast, the relationship between environmental disclosure and financial performance was not statistically significant in food processing companies.
According to the researchers, stakeholders in chemical and automotive industries pay closer attention to environmental risks and regulatory compliance. As a result, transparent environmental reporting carries greater value in these sectors because investors, regulators, and consumers view it as an important signal of corporate responsibility.
Implications for Businesses and Policymakers
The findings have practical implications for corporate leaders, investors, and policymakers.
For businesses, the study suggests that sustainability reporting should be integrated into strategic decision-making rather than treated as a compliance requirement. Environmental disclosure is most valuable when accompanied by measurable operational improvements and investments in green technology.
For regulators, the research supports stronger verification and assurance mechanisms for sustainability reports. The authors recommend greater use of independent third-party reviews to improve the credibility and quality of environmental disclosures.
For investors, the findings indicate that environmental disclosure can serve as a useful indicator when evaluating long-term business sustainability and financial resilience.
The study also warns against excessive disclosure without corresponding environmental performance improvements. Such practices may create perceptions of greenwashing, potentially undermining stakeholder trust and reducing the financial benefits associated with transparency.
Author Profiles
Dr. Cheng-Wen Lee is a scholar in the Department of International Business, College of Business, Chung Yuan Christian University, Taoyuan City, Taiwan. His research focuses on international business, corporate strategy, sustainability, governance, and organizational performance.
Avi Sunani is a doctoral researcher in the Business Program at Chung Yuan Christian University, Taiwan. His academic interests include environmental disclosure, ESG reporting, corporate governance, sustainability management, and financial performance in emerging markets.
Source
Article Title: Does Green Reporting Pay Off? Evidence from Indonesian Manufacturing Firms
Authors: Cheng-Wen Lee and Avi Sunani
Journal: International Journal of Sustainable Applied Sciences (IJSAS)
Year: 2026
Volume and Pages: Vol. 4, No. 6, pp. 407–426
DOI: https://doi.org/10.59890/ijsas.v4i6.439
URL: https://dmimultitechpublisher.my.id/index.php/ijsas
The study concludes that environmental transparency is associated with stronger financial performance among Indonesian manufacturing companies, particularly when sustainability reporting is supported by green innovation and measurable environmental improvements.
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