Environmental, Social, and Governance (ESG) Practices and Their Financial Implications: A Study of Indonesia and Malaysia Capital Markets

As environmental, social, and governance (ESG) considerations gain prominence, companies are increasingly integrating ESG factors into their decision-making processes. While extensive research has examined ESG in developed markets, limited studies explore its impact on emerging economies. This study investigates whether ESG scores are positively associated with a firm’s market value and profitability in Indonesia and Malaysia. The study utilizes panel data from Refinitiv Eikon and World Bank covering the period 2010–2022. The sample consists of 421 firm-year observations from non-Shariah-compliant companies in Indonesia and Malaysia. The analysis employs random-effects and fixedeffects panel regressions to assess the relationship between ESG scores and corporate financial performance, measured by Tobin’s Q (market value), Return on Assets (ROA), and Return on Equity (ROE). The results indicate a positive and significant relationship between ESG scores and both market value (coefficient = 3.655) and ROE (coefficient = 0.007), suggesting that strong ESG performance enhances firm valuation and shareholder returns. However, the study finds a negative and significant association between ESG and ROA (coefficient = –0.000024), implying that ESG integration may not consistently improve asset efficiency. These findings highlight the mixed financial effects of ESG adoption in emerging markets. The study underscores the need for greater ESG awareness in Indonesia and Malaysia, particularly in guiding companies toward sustainability-driven financial strategies. As ESG integration continues to shape investment decisions, understanding its nuanced impact on financial performance is critical for stakeholders navigating evolving market expectations.