The Influence of Environmental, Social, Governance Disclosure and Investment Opportunity Set on Company Value Moderated by Good Governance in the Banking Industry in Indonesia

Ardianta Rabu, September 02, 2026
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FORMOSA NEWS

ESG Reporting and Investment Opportunities Impact Indonesian State-Owned and Private Banks Differently

Indonesian capital markets exhibit contrasting responses to Environmental, Social, and Governance (ESG) disclosures depending on bank ownership structure. A research study published in 2026 by Muhammad Haffiz Asshiddiq, Isfenti Sadalia, and Syahyunan from the Faculty of Economics and Business at Universitas Sumatera Utara (USU) reveals that ESG transparency reduces firm value in state-owned banks while significantly enhancing market valuation for private banks. The authors evaluated 23 commercial banks listed on the Indonesia Stock Exchange (IDX)—comprising 6 state-owned banks and 17 private banks within the KBMI 2, 3, and 4 categories—from 2020 through 2025. These findings offer crucial insights for financial markets following a noticeable drop in the Infobank15 index from 1269.55 to 1033.55 between late 2023 and 2025, underlining the necessity of non-financial signals during periods of market stress.

Intense global competition and Industry 4.0 advancements require banking institutions to integrate sustainable practices to protect financial system stability. Firm value, evaluated through Tobin’s Q, reflects how investors perceive a bank's operational health, future prospects, and management's capability to build long-term shareholder wealth. However, ongoing academic debates question whether extensive ESG reporting and an expansive Investment Opportunity Set (IOS) consistently deliver positive market signals, and how board governance structures moderate these outcomes.

To analyze these complex market dynamics, the Universitas Sumatera Utara research team utilized panel data regression via the Estimated Generalized Least Squares (EGLS) method using EViews 13. The study evaluated ESG disclosure based on Global Reporting Initiative (GRI) framework metrics, measured IOS using the market-to-book equity ratio, and examined corporate governance through Board of Directors (BOD) size. Non-Performing Loans (NPL) were incorporated as a control variable to account for credit risk and prevent specification bias.

The empirical analysis yielded several critical results regarding bank valuation in Indonesia:

  • Divergent ESG Disclosure Impacts: For state-owned banks, increased ESG disclosure led to a significant negative market response, reducing firm value by 29.03% per unit increase (coefficient of -0.2903). Conversely, ESG disclosure in private banks demonstrated a strong positive effect on firm value (coefficient of 4.1704).
  • Consistent Positive Impact of Investment Opportunities: The Investment Opportunity Set (IOS) consistently increased firm value across both banking sectors, showing significant positive coefficients for state-owned banks (0.8436) and private banks (0.7187).
  • Ineffective Board Moderation on ESG: Board of Directors size showed no statistically significant moderating effect on the relationship between ESG disclosure and firm value across both state-owned and private banking groups.
  • Dual Role of Board Size on Investment Prospects: Expanding the Board of Directors significantly strengthened the positive impact of investment opportunities on state-owned bank valuation (positive interaction coefficient of 0.2503). However, in private banks, a larger board significantly weakened the positive relationship between investment opportunities and firm value (negative interaction coefficient of -0.1812).
  • Non-Performing Loans Depress Value: Elevated NPL ratios significantly reduced firm value across both state-owned and private bank models.

These findings carry important strategic implications for bank executives, institutional investors, and financial policymakers. For state-owned banks, extensive ESG disclosures are often interpreted by market participants as added operational cost burdens and potential greenwashing risks that divert focus from core short-term profitability. In contrast, private banks successfully utilize ESG disclosures to mitigate information asymmetry, lower perceived risk, and build market credibility. Furthermore, the study highlights governance trade-offs: while larger boards enhance monitoring and institutional experience in state-owned banks to capture major investment opportunities, oversized boards in private banks create internal red tape, delayed decision-making, and structural frictions that hinder strategic agility.

Reflecting on these corporate dynamics, the research team at Universitas Sumatera Utara noted that quantitative board expansion alone does not guarantee effective sustainability oversight. Muhammad Haffiz Asshiddiq and his colleagues at Universitas Sumatera Utara emphasized that banking institutions should prioritize functional director expertise and specialized governance quality over mere structural board size to achieve optimal market appreciation.

Author Profiles

  1. Muhammad Haffiz Asshiddiq, S.E.: Lead researcher and graduate scholar in Management Science at the Faculty of Economics and Business, Universitas Sumatera Utara, specializing in corporate finance, Good Corporate Governance (GCG), and ESG disclosures.
  2. Prof. Dr. Isfenti Sadalia, SE., ME.: Professor at the Faculty of Economics and Business, Universitas Sumatera Utara, with extensive expertise in capital markets, risk management, and behavioral finance.
  3. Prof. Dr. Syahyunan, SE., M.Si.: Senior academic and Professor at the Faculty of Economics and Business, Universitas Sumatera Utara, specializing in corporate financial strategy and business performance assessment.

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