ESG Performance and Firm Value: Green Innovation as a Mediating Variable (Evidence from Indonesia)
This study examines the relationship between ESG performance, green innovation, and firm value among Indonesian public companies. The primary focus is on understanding how ESG performance can drive green innovation and how such innovation affects firm value. In addition, the study tests the role of green innovation as a mediating variable in the relationship between ESG performance and firm value. The research draws on a combination of Resource-Based View (RBV), Stakeholder Theory, and Legitimacy Theory, which suggest that companies integrating sustainability into their business strategies gain competitive advantage, social legitimacy, and stakeholder support.
The research method uses data from companies listed on the Indonesia Stock Exchange, totalling 384 firm observations. The analysis employs linear regression in Stata 17, with mediation testing conducted using the Hayes Process. ESG performance is measured using ESG scores, whilst green innovation is proxied by companies’ green innovation indicators, covering both product and process green innovation. The study also incorporates several control variables — institutional ownership, firm size, firm age, leverage, and board size — to strengthen the validity of the results. In addition, a series of robustness tests was carried out, including replacing the green innovation proxy with the logarithm of R&D expenditure and substituting ESG performance with Bloomberg’s ESG disclosure, to ensure consistency of the findings.
The results show that ESG performance has a positive and significant effect on firm value, as well as a positive effect on green innovation. These findings indicate that companies with better ESG performance tend to be more active in environmentally friendly innovation and receive positive market appreciation. However, the study uncovers an interesting result: green innovation actually has a negative effect on firm value. This suggests that the market still views green innovation investment as a cost burden in the short term, so its economic benefits are not yet fully reflected in firm value.
The study’s main contribution lies in demonstrating that green innovation serves as a significant mediator in the relationship between ESG performance and firm value. The mediation analysis reveals a negative and significant indirect effect, indicating that although ESG performance directly enhances firm value, the implementation of green innovation requires substantial investment and has yet to deliver immediate financial benefits to investors. These findings enrich prior literature, which has generally only tested the direct relationships between ESG, green innovation, and firm value without exploring the mediating mechanisms connecting the three variables, particularly in the context of developing countries such as Indonesia.
The novelty of the research lies in its integration of sustainability and innovation perspectives by testing green innovation as a mediating mechanism between ESG performance and firm value, alongside the use of various robustness checks demonstrating consistent results. The finding that green innovation reduces firm value in the short term — even after testing with a time lag of up to two years — makes an important contribution to the development of RBV, Stakeholder Theory, and Legitimacy Theory. The study offers guidance for company management that investment in green innovation should be viewed as a long-term strategy requiring a maturation period before delivering optimal economic benefits. For regulators and investors, the results highlight the importance of building a market ecosystem that better appreciates sustainability investment, so that companies focus not only on short-term profits but also on creating long-term sustainable value.
Detailed information about this research can be found in our paper at: https://doi.org/10.1108/IJIS-04-2025-0190