Do sustainable practices pay dividends? ESG performance, carbon intensity, and green investment in Indonesia’s energy firms

Most theoretical and empirical literature related to corporate sustainability explains the relationship between corporate ESG performance, profitability, and market value. However, few empirical studies have considered how corporate dividend policies are affected by ESG performance, carbon emission intensity, and green capital expenditure (Green CAPEX). Therefore, this study scrutinizes the role of ESG performance, carbon emission intensity, and Green CAPEX in dividend policies in the Indonesian energy sector. A two-step system GMM dynamic panel model was applied to test the hypotheses on 33 energy companies listed on the IDX under the observation period from 2020 to 2024, generating 165 firm-year observations. The explanatory variables of dividend policy are dividend yield and payout ratio. The ESG variables were ESG ranking, carbon emission intensity, and Green CAPEX. The control variables comprised industry size, profitability, leverage, liquidity, and lagged dividends, as discussed in the following section. The results show that ESG performance considerably influences dividend policy by positively impacting it, in contrast to the negative impact of carbon emission intensity, which suggests that high risk hinders dividend payments. Green CAPEX considerably impact dividend policy, reinforcing the idea that green investments are a value-improving strategy and not a substitute. Furthermore, with respect to dividends, the stronger the ESG performance, the weaker the negative impact of leverage; the stronger the carbon emission intensity, the weaker the positive impact of profitability on dividends. All the proposed hypotheses were empirically supported. Future research could examine the role of sustainability-oriented dividend policies in other industries and countries, the impact of individual ESG dimensions, other environmental risk measurement methods, and non-cash dividend payouts in the context of energy transition. This study offers new evidence from emerging markets by integrating ESG performance, carbon emission intensity, and green capital expenditure into a dynamic dividend policy analysis. Thus, this study helps address the existing research gap and contributes to the dynamic dividend policy literature by exploring sustainability performance, environmental risk, and green investment within a sustainability-oriented dividend policy.