Companies should prioritize environmental performance

Oct 13, 2025 by vinooalluri.com 59 views

The Impact of Environmental Performance on Financial Performance: A Study on the Indonesia Stock Exchange

Introduction

In recent years, the importance of environmental performance has become a crucial aspect of a company's overall strategy. As consumers and stakeholders become increasingly aware of the environmental impact of their purchasing decisions, companies are under pressure to adopt sustainable practices and reduce their environmental footprint. However, the relationship between environmental performance and financial performance is complex, and many companies struggle to balance their short-term financial goals with their long-term environmental objectives.

This study aims to investigate the effect of environmental performance on financial performance, with a focus on companies listed on the Indonesia Stock Exchange (IDX) during the 2017-2021 period. We also examine the role of the Board of Commissioners as a moderating variable in this relationship. Our findings have important implications for companies seeking to improve their environmental performance while maintaining their financial health.

Methodology

This study uses an associative research design with secondary data. The population consists of 70 manufacturing companies listed on the IDX during the period under study. We applied purposive sampling to select samples that meet certain criteria, including a minimum market capitalization of IDR 1 trillion and a minimum trading volume of 1 million shares per day.

We analyzed the data using descriptive statistical analysis and multiple linear regression with panel data. Our dependent variable is financial performance, measured by return on equity (ROE). Our independent variable is environmental performance, measured by a composite index of environmental, social, and governance (ESG) metrics. We also included the proportion of the Board of Commissioners as a moderating variable in our analysis.

Results

Our results show that environmental performance has a negative and insignificant influence on financial performance. This suggests that, in the short term, companies may not see a direct return on investment from their environmental efforts. However, we also found that the proportion of the Board of Commissioners has a significant negative influence on financial performance. This suggests that companies with a high proportion of Board of Commissioners may be more effective in supervising and implementing environmental policies.

Interestingly, we found that the proportion of the Board of Commissioners also acts as a significant moderation variable in influencing the relationship between environmental performance and financial performance. This means that the proportion of the Board of Commissioners can either enhance or diminish the impact of environmental performance on financial performance.

Discussion

Our findings have important implications for companies seeking to improve their environmental performance while maintaining their financial health. While environmental performance may not directly contribute to financial performance in the short term, it can improve a company's image in the eyes of consumers and stakeholders. This can lead to long-term benefits, such as increased brand loyalty and customer retention.

Our results also suggest that companies should pay attention to the structure of their Board of Commissioners. A high proportion of Board of Commissioners can provide tighter supervision and more effective decision-making, leading to improved financial performance.

Conclusion

In conclusion, this study provides new insights into the relationship between environmental performance and financial performance. Our findings suggest that companies should not focus solely on achieving short-term financial performance, but also prioritize environmental performance. By doing so, companies can create a synergy that supports long-term growth and sustainability.

We also recommend that companies pay attention to the structure of their Board of Commissioners, as a high proportion of Board of Commissioners can provide tighter supervision and more effective decision-making. By adopting these strategies, companies can optimize their performance in both the field of finance and the environment.

Recommendations

Based on our findings, we recommend the following:

Companies should prioritize environmental performance: While environmental performance may not directly contribute to financial performance in the short term, it can improve a company's image in the eyes of consumers and stakeholders.
Companies should pay attention to the structure of their Board of Commissioners: A high proportion of Board of Commissioners can provide tighter supervision and more effective decision-making, leading to improved financial performance.
Companies should adopt a long-term perspective: By prioritizing environmental performance and adopting a long-term perspective, companies can create a synergy that supports long-term growth and sustainability.

Limitations

This study has several limitations. First, our sample size is limited to 70 manufacturing companies listed on the IDX. Second, our data is limited to the 2017-2021 period. Third, our analysis is based on secondary data, which may not capture the nuances of a company's environmental and financial performance.

Future Research Directions

Future research should aim to replicate this study with a larger sample size and a longer time period. Additionally, researchers should explore the role of other moderating variables, such as corporate governance and stakeholder engagement, in influencing the relationship between environmental performance and financial performance.

Conclusion

In conclusion, this study provides new insights into the relationship between environmental performance and financial performance. Our findings suggest that companies should prioritize environmental performance and pay attention to the structure of their Board of Commissioners. By adopting these strategies, companies can optimize their performance in both the field of finance and the environment.
Frequently Asked Questions: Environmental Performance and Financial Performance

Q: What is the relationship between environmental performance and financial performance?

A: Our study found that environmental performance has a negative and insignificant influence on financial performance in the short term. However, we also found that the proportion of the Board of Commissioners has a significant negative influence on financial performance, suggesting that companies with a high proportion of Board of Commissioners may be more effective in supervising and implementing environmental policies.

Q: Why is environmental performance important for companies?

A: Environmental performance is important for companies because it can improve a company's image in the eyes of consumers and stakeholders. This can lead to long-term benefits, such as increased brand loyalty and customer retention. Additionally, companies that prioritize environmental performance may be more attractive to investors and may have a competitive advantage in the market.

Q: What is the role of the Board of Commissioners in influencing the relationship between environmental performance and financial performance?

A: Our study found that the proportion of the Board of Commissioners acts as a significant moderation variable in influencing the relationship between environmental performance and financial performance. This means that the proportion of the Board of Commissioners can either enhance or diminish the impact of environmental performance on financial performance.

Q: How can companies prioritize environmental performance while maintaining their financial health?

A: Companies can prioritize environmental performance by adopting sustainable practices and reducing their environmental footprint. They can also pay attention to the structure of their Board of Commissioners, as a high proportion of Board of Commissioners can provide tighter supervision and more effective decision-making.

Q: What are the benefits of prioritizing environmental performance?

A: The benefits of prioritizing environmental performance include improved brand image, increased customer loyalty, and a competitive advantage in the market. Additionally, companies that prioritize environmental performance may be more attractive to investors and may have a positive impact on their financial performance in the long term.

Q: What are the limitations of this study?

A: This study has several limitations, including a limited sample size and a limited time period. Additionally, our analysis is based on secondary data, which may not capture the nuances of a company's environmental and financial performance.

Q: What are the future research directions for this study?

A: Future research should aim to replicate this study with a larger sample size and a longer time period. Additionally, researchers should explore the role of other moderating variables, such as corporate governance and stakeholder engagement, in influencing the relationship between environmental performance and financial performance.

Q: What are the implications of this study for companies and policymakers?

A: The implications of this study for companies and policymakers are that companies should prioritize environmental performance and pay attention to the structure of their Board of Commissioners. Policymakers should also consider the role of environmental performance in influencing financial performance and develop policies that support sustainable business practices.

Q: What are the next steps for companies that want to prioritize environmental performance?

A: Companies that want to prioritize environmental performance should start by assessing their current environmental performance and identifying areas for improvement. They should also develop a sustainability strategy that aligns with their business goals and objectives. Additionally, they should pay attention to the structure of their Board of Commissioners and ensure that they have a high proportion of Board of Commissioners who are committed to sustainable business practices.

Q: What are the benefits of prioritizing environmental performance for investors?

A: The benefits of prioritizing environmental performance for investors include a positive impact on financial performance in the long term, improved brand image, and a competitive advantage in the market. Additionally, companies that prioritize environmental performance may be more attractive to investors and may have a lower risk of financial distress.

Q: What are the next steps for investors who want to prioritize environmental performance?

A: Investors who want to prioritize environmental performance should start by assessing the environmental performance of companies in their portfolio. They should also develop a sustainability strategy that aligns with their investment goals and objectives. Additionally, they should pay attention to the structure of the Board of Commissioners and ensure that they have a high proportion of Board of Commissioners who are committed to sustainable business practices.