ESG Governance and Financial Performance: The Role of the Board in Integrating Sustainability into the Strategy of Indonesian Public Companies
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Abstract
This study analyzes how the board's role (structure and process)
drives the integration of environmental, social, and governance
(ESG) into corporate strategy and its implications for the financial
performance of listed companies listed on the Indonesia Stock
Exchange. Using a panel-based quantitative-empirical design
(2019–2025), the study develops an auditable Strategic ESG
Integration Index (ESG-SI)—covering the linkage of ESG targets to
planning & budgeting, green capital allocation, ESG risk recording
in the risk register, ESG KPI linkage to executive remuneration, and
assurance data. Key board variables include the proportion of
independent commissioners, gender diversity, ESG expertise of
board members, the existence of a sustainability/risk committee,
the intensity of the ESG agenda, and board training. The
relationships are tested using panel regression (firm and year fixed
effects), mediation tests (SEM-PLS/bootstrapping), and robust
tests (alternative performance proxies, winsorizing, and index
redefinition). The results show that board ESG expertise, the
intensity of the ESG agenda, and the relevance of ESG KPIs to
remuneration significantly enhance ESG-SI. Furthermore, ESG-SI
is positively associated with ROA and lowers the cost of equity
capital (COE), with a stronger effect in high-ESG risk industries.
These findings support a mediating mechanism: effective boards
→ strategic ESG integration → improved financial performance.
The study's key contributions are the clear distinction between
symbolic disclosure and process-based strategic integration and
resource allocation, the measurement of board
competencies/processes as drivers of integration, and new
evidence from emerging market contexts. Practical implications
include strengthening board ESG competencies, institutionalizing
the ESG agenda, and aligning remuneration with sustainability
targets, while policy implications encourage process- and outcomebased
disclosure.
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