ESG, Corporate Governance, and Firm Value in Indonesian Banks: The Mediating Role of Profitability

Abstract

Global pressure for corporate sustainability has pushed capital market investors toward firms with strong Environmental, Social, and Governance (ESG) performance, with banks positioned as gatekeepers of capital allocation. Evidence on whether ESG raises firm value remains contradictory: several Indonesian banks recorded rising ESG scores between 2022 and 2024 without a corresponding rise in Price-to-Book Value, and prior research has often treated ESG in isolation from governance oversight, Independent Commissioners, Audit Committees, and Institutional Ownership, that validates whether such claims are credible. This study examines profitability's mediating role in the effects of ESG practices and governance structures on firm value among banks listed on the Indonesia Stock Exchange (IDX). Panel data from 26 banks over 2022–2024 (78 firm-year observations) were estimated via the Random Effects Model with cluster-robust standard errors, with mediation tested via percentile bootstrap. Within this sample and period, ESG Score and Institutional Ownership significantly raise profitability (lnROA), while Independent Commissioners and the Audit Committee do not; none of the four variables move firm value (lnPBV) directly, but profitability itself raises firm value and acts as an indirect-only mediator for ESG. These results suggest a pragmatic pattern in the sample studied: sustainability and governance measures are not priced directly, but appear to matter once translated into demonstrated profitability. Given the models' modest explanatory power (Adjusted R-squared of 12.55% and 10.73%) and the limited sample, these findings should be read as specific to this model, sample, and period rather than generalized to the broader Indonesian banking sector.