Non-linear effect of Environmental, Social, and Governance on corporate performance (study in non-financial firms listed on Indonesia Stock Exchange)

Environmental, Social, and Governance (ESG) factors have become essential considerations for stakeholders. Balancing external and internal performance is crucial. However, there are some constraints to implementing ESG at the cor­porate level, especially in Indonesia. This study aims to test the effect of ESG on corporate performance. The non-financial firms listed on Indonesia Stock Ex­change from 2016–2020 were used as a sample. Empirical evidence found the U-shaped effect of ESG rating on corporate performance. Further, robustness tests are conducted by dividing the sample annually and removing the 2020 pe­riod to show more robust evidence. In contrast, the results showed no evidence of a U-shaped effect. The robustness test showed that the ESG rating positively affected corporate performance in 2016–2019 and turned negative in 2020, the first time COVID-19 happened in Indonesia. This result indicated that in a crisis time, implementing ESG will be costly and reflected in financial performance. In contrast, during a non-crisis time, ESG positively impacts financial performance.