When Good Governance Hurts Profit: Reassessing ESG and Firm Value Relationships

This study revisits the paradoxical role of corporate governance in shaping the relationship between environmental, social, and governance (ESG) performance and firm value within emerging markets. Using a dataset of publicly listed companies in Indonesia from 2020–2024, we examine how environmental performance (measured by PROPER ratings), social disclosure (SDI), and audit committee size (ACS) jointly affect profitability (ROA) and market valuation (PBV). Applying Partial Least Squares–Structural Equation Modeling (PLS-SEM) via SmartPLS 4, the analysis reveals a complex dynamic: environmental excellence enhances profitability, while larger audit committees—though associated with higher transparency—tend to reduce operational efficiency. Profitability emerges as the key mediator linking ESG initiatives to market value, confirming that investors value sustainability primarily when it strengthens financial performance. The findings challenge the assumption that more governance always improves outcomes, emphasizing the need for context-specific and efficiency-oriented governance structures in emerging economies.