ESG Performance and Firm Value in Indonesia: Do Political Connections and External Assurance Matter?

Abstract

This study examines how ESG performance translates into firm value in an Indonesia setting characterized by high information asymmetry, strong political–business linkages, and weak ESG assurance adoption. Using panel data from non-financial firms listed on the Indonesia Stock Exchange over the 2010–2023 period (1700 firm-year observations), we analyze whether political connections and external ESG assurance condition the value relevance of ESG performance. The results show that ESG performance is positively associated with firm value; however, this relationship is highly context-dependent. Political connections significantly strengthen the ESG–firm value relationship, suggesting that politically connected firms are better able to convert ESG engagement into economic value by enhancing legitimacy, reducing regulatory uncertainty, and securing stakeholder support. In contrast, external ESG assurance does not significantly moderate this relationship, reflecting the limited credibility and weak differentiation of assurance practices in Indonesia’s immature sustainability assurance market. These findings highlight that, in emerging markets, ESG disclosures are not uniformly credible and may be subject to political capture or symbolic reporting. ESG creates firm value primarily when it is reinforced by institutional mechanisms that reduce perceived risk and enhance credibility. This study contributes to the ESG literature by demonstrating that the valuation effects of sustainability performance depend not only on ESG outcomes but also on the political and institutional environment in which firms operate, with important implications for regulators, investors, and managers in Indonesia.

1. Introduction

The primary objective of a company is to maximize its value, which determines the level of prosperity of its shareholders (Cai & Li, 2018; Mobbs et al., 2021; Wang et al., 2020). Company value reflects the achievements and trust built over several years through various company activities, from its inception to the present (Ioannou & Serafeim, 2019; Mobbs et al., 2021; Rudyanto & Pirzada, 2020; Upadhyay & Öztekin, 2021). Company value also reflects investors’ perceptions of a company, often linked to its stock price (Putu et al., 2014). Investors evaluate the company’s success in managing its resources through the end of the year, which is reflected in its stock price. This assessment also serves as a benchmark for the success of company management, contributing to increased shareholder confidence (Bouteska & Mefteh-Wali, 2021; Mobbs et al., 2021; Rudyanto & Pirzada, 2020; Yazdanfar & Öhman, 2015).

Various factors influence company value, and one factor that has received increasing attention is ESG performance. ESG performance has been highlighted by various groups, especially practitioners, governments, and academics (Lestari & Soewarno, 2023; Mkadmi & Daafous, 2025; Zharfpeykan & Bai, 2025). The increasing importance of environmental, social, and economic issues such as climate change, deforestation, poverty, and labor exploitation related to corporate activities has heightened stakeholder sensitivity and led to demands for companies to implement ESG (Environmental, Social, and Governance) practices (Tjahjadi et al., 2021; Suharyono & Zarefar, 2024). On the other hand, the United Nations (UN) encourages investors to consider a company’s ESG performance before making investment decisions (Juddoo et al., 2023; Lee et al., 2021).

Despite the growing global emphasis on ESG, its implementation and economic consequences remain highly context-specific. In Indonesia, ESG practices have developed within an institutional environment characterized by evolving regulatory frameworks, uneven enforcement, and relatively high information asymmetry. Compared to developed economies with mature capital markets and strong monitoring mechanisms, Indonesian firms operate under greater managerial discretion in sustainability reporting, raising concerns regarding the credibility and value relevance of ESG disclosures for investors.

Most prior studies examining the relationship between ESG performance and firm value are conducted in developed-country settings, where limited political intervention and strong external assurance mechanisms enhance the credibility of ESG reporting. In contrast, Indonesia exhibits institutional characteristics such as weaker disclosure enforcement, close political–business relationships, and heterogeneous adoption of external assurance. These features raise important questions regarding whether ESG performance conveys the same economic meaning for investors in Indonesia as documented in developed markets. Accordingly, examining ESG performance within the Indonesian context offers an opportunity to extend the ESG valuation literature beyond developed-market assumptions.

Rising investor awareness of environmental and non-financial risks, including social responsibility and corporate governance, has increased pressure on companies to pay greater attention to non-financial aspects of their operations (Gutsche, 2016; Tasnia et al., 2020; Suharyono et al., 2023). In Indonesia, investors, employees, suppliers, customers, and regulators increasingly expect companies to address these issues, implement mitigation strategies, and disclose relevant information transparently (Afni et al., 2018; Kumar & Prakash, 2019; Lestari & Soewarno, 2023; Rodriguez-Fernandez, 2016; Tjahjadi et al., 2021). Companies typically report these risks under Environmental, Social, and Governance categories; however, from a managerial perspective, ESG initiatives represent strategic investments that may not immediately translate into financial benefits (Afni et al., 2018; Kumar & Prakash, 2019).

Several studies document a positive relationship between ESG performance and firm value in specific national contexts, including Korea (Tasnia et al., 2020), Germany (Aydoğmuş et al., 2022), China (Miao et al., 2023), and India (Sunil & Nair, 2021). Conversely, other studies report a negative relationship between ESG performance and firm value in the United Kingdom (Gutsche, 2016), Italy (Kevser et al., 2024), and Latin America (Castillo-Merino & Rodríguez-Pérez, 2021). These mixed findings suggest that the ESG–firm value relationship is not universal but instead depends on country-specific institutional settings, underscoring the need for evidence from Indonesia.

Indonesia provides a particularly relevant research setting. As one of the largest emerging economies in the region, Indonesia has formally introduced sustainability reporting requirements through Financial Services Authority (OJK) Regulation No. 51/POJK.03/2017, which mandates sustainability reporting for certain listed companies and financial institutions. Nevertheless, the quality and consistency of enforcement remain uneven, allowing firms substantial discretion over the scope, depth, and credibility of ESG disclosures.

Moreover, Indonesia is characterized by strong political–business linkages, where politically connected firms may benefit from preferential access to government contracts, regulatory leniency, and state-controlled resources. In such an environment, ESG disclosures may function not only as transparency tools but also as strategic instruments to maintain legitimacy and manage stakeholder perceptions. This raises concerns regarding the credibility of ESG reporting when firms possess political connections that potentially weaken external monitoring mechanisms.

This study argues that political connections and external assurance moderate the relationship between ESG performance and firm value. Investors require ESG information that is credible and reliable. External assurance enhances the credibility of sustainability reports by verifying the accuracy and reliability of disclosed information (Aladwey et al., 2022; Martínez-Ferrero & García-Sánchez, 2017; Quick & Inwinkl, 2020; Uyar et al., 2024). In Indonesia, where regulatory oversight and enforcement are relatively weak, external assurance is expected to play a critical governance role in mitigating information asymmetry. However, as of 2023, Indonesia does not mandate external assurance for sustainability reports (PwC, 2023), creating an institutional gap that warrants empirical investigation.

Political connections may also shape how ESG performance influences firm value. Faccio (2006) defines politically connected firms as those with major shareholders, board members, or executives who are affiliated with government officials or political parties, including through family ties. Such firms often enjoy easier access to financing and key resources (Boubakri et al., 2012; Faccio, 2010; Fisman, 2001; Lassoued & Attia, 2014; Shen et al., 2015; Xu et al., 2013). Within the Indonesian institutional context, political connections may weaken market discipline and influence investors’ interpretation of ESG information, thereby affecting firm value.

This study empirically examines the effect of ESG performance on firm value, with political connections and external assurance as moderating variables in the Indonesian setting. The sample consists of non-financial companies listed on the Indonesia Stock Exchange from 2010 to 2023. By explicitly focusing on Indonesia, this study contributes context-specific evidence from a national setting characterized by institutional voids, weak enforcement, and strong political–business linkages, where the credibility and economic consequences of ESG disclosures remain underexplored.

The remainder of this research, in Section 2, presents a literature review and hypothesis development. Section 3 presents the research method used in this study. Section 4 presents the regression results and their discussion. Finally, conclusions, limitations, and suggestions for further research are presented.

2. Literature Review and Hypothesis Development

In Indonesia, the relationship between ESG disclosure and firm value is highly context-dependent and shaped by institutional characteristics such as weak regulatory enforcement, institutional voids, and close political–business linkages. Prior studies from countries with similar institutional characteristics show that firms operating in such environments often face limited monitoring and enforcement, which affects both the quality and credibility of ESG disclosures (Boubakri et al., 2012; Liang & Renneboog, 2017; Marquis & Qian, 2014). Within the Indonesian institutional setting, ESG reporting may function less as a reflection of substantive sustainability performance and more as a strategic tool to gain legitimacy and manage stakeholder perceptions, particularly for politically connected firms.

Concerns regarding ESG credibility in Indonesia are further reinforced by the greenwashing literature, which highlights the decoupling between ESG disclosure and actual sustainability performance. Empirical evidence suggests that firms operating under weak institutional environments frequently engage in symbolic ESG reporting, using sustainability narratives to signal compliance and responsibility without corresponding improvements in real outcomes (Cho et al., 2014; Marquis & Qian, 2014). Recent studies provide direct evidence that ESG disclosure and ESG scores may reflect disclosure strategies rather than genuine sustainability efforts, a concern that is particularly relevant in institutional contexts characterized by political incentives and reputational pressures such as Indonesia (Mirza et al., 2025).

Moreover, politically connected firms in Indonesia may exploit ESG disclosure as a legitimacy-enhancing or political instrument, leveraging sustainability reporting to obscure opportunistic behavior and secure preferential access to resources (Du et al., 2016; Pan et al., 2020). In the Indonesian context, political connections can weaken external monitoring mechanisms and reduce market discipline, thereby exacerbating the risk of greenwashing. Consequently, ESG scores in Indonesia should be interpreted as contested informational signals, whose credibility depends on governance mechanisms rather than as purely substantive measures of sustainability performance.

Against this backdrop, external assurance emerges as a potentially important credibility-enhancing mechanism in Indonesia. Prior research suggests that, under weak enforcement regimes, external assurance can mitigate information asymmetry and enhance investor confidence in sustainability disclosures (Martínez-Ferrero & García-Sánchez, 2017; Simnett et al., 2009). However, the effectiveness of assurance is not uniform and may be conditional on political connections, as politically connected Indonesian firms may adopt assurance symbolically to reinforce legitimacy without materially improving disclosure quality (Quick & Inwinkl, 2020). Collectively, this literature supports examining the interaction between ESG performance, political connections, and external assurance within the Indonesian institutional environment, rather than making broader regional or emerging-market generalizations.

2.1. The Influence of ESG Performance and Firm Value

Stakeholder theory (Freeman, 1999) suggests that firms create long-term value by addressing the interests of multiple stakeholders, including employees, customers, regulators, and society, rather than focusing solely on shareholders (Freeman, 1999). Sustainability disclosure functions as a key communication mechanism through which firms demonstrate accountability and commitment to stakeholders, thereby supporting legitimacy and long-term competitiveness (Kevser et al., 2024).

Nevertheless, the prior literature documents mixed evidence on the ESG–firm value relationship. While ESG engagement can enhance reputation, stakeholder trust, and access to capital, it also entails substantial costs related to compliance, monitoring, and potential managerial overinvestment (Berg et al., 2018). In some institutional settings, ESG initiatives may reduce firm value if their costs outweigh the associated benefits or if ESG disclosure is largely symbolic.

The value implications of ESG performance therefore depend heavily on national institutional characteristics. In Indonesia, which is characterized by higher information asymmetry and weaker formal institutions, ESG disclosure plays a particularly important role as a legitimacy and credibility signal. During the 2010–2023 period in Indonesia, increasing investor attention to ESG issues, the adoption of the Sustainable Development Goals, and the gradual diffusion of sustainability reporting practices heightened stakeholder scrutiny of listed firms. Under these conditions, the benefits of ESG engagement—such as reduced perceived risk, enhanced reputation, and improved access to capital—are more likely to outweigh the associated costs.

Accordingly, conditional on the Indonesian institutional environment and the sample period, this study expects ESG performance to be positively associated with firm value, consistent with stakeholder theory and prior empirical findings (Liao et al., 2018; Mukhtaruddin et al., 2014; Clarkson et al., 2019; Cheng & Feng, 2023; Si et al., 2019; Yi & Yang, 2024).

H1. 

ESG performance has a positive effect on firm value.

2.2. ESG Performance, Political Connections, and Firm Value

Political connections provide firms with access to government resources, contracts, and regulatory advantages that may not be available to other companies (Faccio, 2006). According to social network theory, politically connected firms possess substantial social capital—such as policy knowledge, regulatory access, and relational resources—that can enhance financial stability (Adhikari et al., 2006; Claessens et al., 2008; Faccio, 2010; Marie et al., 2024). In Indonesia, where political–business linkages are pervasive, politically connected firms also have strong incentives to maintain political legitimacy and safeguard their reputation (Faccio, 2010; Lassoued & Attia, 2014).

Political connections can indirectly influence ESG practices. Within the Indonesian setting, politically connected firms tend to exhibit lower risk-taking and greater financial stability (Chekir & Diwan, 2013; Silvera et al., 2022; Wu et al., 2012). At the same time, such firms face greater public visibility and legitimacy pressure (Shen et al., 2015), which may encourage ESG engagement to protect firm value.

Furthermore, Indonesian firms with strong political ties may leverage these connections to signal commitment to ESG practices, thereby strengthening reputation and brand appeal among investors and stakeholders (Li et al., 2016; Marie et al., 2024). Political connections may also facilitate access to financing and partnerships that support ESG initiatives and enhance the financial returns from sustainability investments (Pham, 2019; Firmansyah et al., 2022).

H2. 

Political connections strengthen the positive influence of ESG performance on firm value.

2.3. ESG Performance, External Assurance, and Firm Value

While ESG performance may contribute to firm value, the credibility of ESG disclosures remains a critical concern because ESG outcomes are difficult to observe and verify. Compared to financial information, ESG disclosures are more qualitative, forward-looking, and subject to managerial discretion, intensifying information asymmetry between firms and stakeholders. From an agency theory perspective, this asymmetry increases the risk of opportunistic or symbolic ESG reporting.

External ESG assurance serves as a verification mechanism that reduces information asymmetry by providing independent validation of sustainability disclosures. By subjecting ESG reports to third-party review, firms constrain opportunistic behavior and enhance disclosure credibility. Even when assurance quality cannot be perfectly observed, the presence of external assurance itself acts as a credible signal, consistent with signaling theory, reducing investor uncertainty and improving firm valuation (Bae et al., 2018; Clarkson et al., 2019; Simoni et al., 2020).

This credibility-signaling role of external assurance is particularly salient in Indonesia, where ESG reporting standards, assurance practices, and regulatory enforcement remain uneven. In such an environment, investors face difficulty distinguishing between substantive and symbolic ESG disclosures. Consequently, the presence of external assurance—rather than its unobservable quality—provides incremental informational value by mitigating information asymmetry and enhancing disclosure credibility (Dakhli, 2021; Martínez-Ferrero & García-Sánchez, 2017).

Accordingly, this study conceptualizes external ESG assurance as a binary credibility signal. By reducing information asymmetry and perceived disclosure risk, external assurance is expected to strengthen the positive relationship between ESG performance and firm value in Indonesia.

H3. 

External assurance strengthens the positive effect of ESG performance on firm value.

3. Research Method

3.1. Research Data

This study uses non-financial companies listed on the Indonesia Stock Exchange (IDX) during 2010–2023, yielding 1700 firm-year observations. Financial firms are excluded due to their distinct regulatory environments and reporting requirements.

The 2010–2023 period is selected to capture the growing relevance of ESG reporting and investor attention in Indonesia, particularly following global developments such as the Paris Agreement and the increasing diffusion of sustainability reporting practices. This period also includes major economic disruptions, including the COVID-19 pandemic, which heightened stakeholder sensitivity to non-financial risks.

To address potential structural changes over time, the empirical analysis controls for time-fixed effects, thereby mitigating the influence of macroeconomic shocks and regulatory developments on the results. Accordingly, this sample period provides an appropriate setting to examine ESG performance, political connections, external assurance, and firm value in an evolving emerging-market context.

3.2. Analysis Technique

The analysis technique used to test the research hypotheses is panel data regression. The following is the empirical model used for each hypothesis.

FVit = α + β1ESGit + β2ROAit + β3DERit + β4Sizeit + β5BOCit + β6ACit + ϵ

(1)

FVit = α + β1ESGit + β2KPit + β3ESG × KPit + β4ROAit + β5DERit + β6Sizeit + β7BOCit + β8ACit + ℇit.

(2)

FVit = α + β1ESGit + β2EAit + β3ESG × EAit + β4ROAit + β5DERit + β6Sizeit + β7BOCit + β8ACit + ℇit.

(3)

where FV is firm value, ESG is ESG performance, KP is political connections, EA is external assurance, ROA is return on assets, DER is debt to equity ratio, SIZE is company size, BOC is board of commissioners size, and AC is audit committee size.

3.3. Operational Definition and Variable Measurement

The dependent variable in this study is firm value. Firm value (FV) measures a company’s economic value, perceived by the market and investors (Mobbs et al., 2021; Rudyanto & Pirzada, 2020). Firm value represents shareholder wealth and reflects the company’s business prospects, including financial performance, management, and future growth potential (Dkhili, 2024; Kao et al., 2019).

Referring to several previous studies, firm value is measured using Tobin’s Q (Aydoğmuş et al., 2022; Benamraoui et al., 2019; Mishra & Kapil, 2017; Nekhili et al., 2017; Ramadhan et al., 2022; Zarefar & Narsa, 2023). A high Tobin’s Q indicates investor optimism about the company and willingness to invest in it (Aydoğmuş et al., 2022; Mishra & Kapil, 2017). A company’s Tobin’s Q is calculated using the following equation (Ramadhan et al., 2022; Zarefar & Narsa, 2023).

Tobin’s Q = (market value of equity + book value of debt)/book value of total assets

The independent variable in this study is ESG performance. ESG performance is a company’s achievement in implementing corporate governance and social (environmental and social) responsibility (Lee et al., 2021; Truong, 2024). ESG performance is measured using the ESG score from the Refinitiv dataset. Many researchers use Refinitiv’s ESG scores (Cheng & Feng, 2023; Dkhili, 2024; Espinosa-Méndez et al., 2023; Gutsche, 2016; Kong et al., 2023). Refinitiv provides one of the most extensive ESG datasets on the market, with data dating back to 2002. This data assesses companies’ ESG performance across 10 themes and three pillars, using over 600 criteria (Tasnia et al., 2020; Truong, 2024).

This study uses two moderating variables: political connections and external assurance. Political connections refer to the relationship or link between an individual, company, or organization and a powerful government official or politician (Faccio, 2006). Referring to several previous studies (Ang et al., 2013; Chekir & Diwan, 2013; Li et al., 2016; Pham, 2019; Saleh et al., 2020; Silvera et al., 2022), political connections (KP) are measured using a dummy variable, which has a value of 1 if one of the shareholders, board of directors, or board of commissioners is an official or former high-ranking government official (e.g., minister, member of national parliament, or senior military personnel), a member of a political party, or has family ties with these politicians, and a value of 0 otherwise.

The second moderating variable in this study is external assurance. External assurance is an independent party that provides review services for a company’s activities and reporting (Ioannou & Serafeim, 2019; Uyar et al., 2024). In the context of this study, the review or audit services performed by external assurance are for ESG activities and the company’s sustainability report. According to several researchers, the use of external assurance for ESG activities and sustainability reports is to increase public trust in the ESG activities reported by companies through sustainability reports (Akisik & Gal, 2020; Ioannou & Serafeim, 2019; Quick & Inwinkl, 2020; Simoni et al., 2020; Uyar et al., 2024).

Referring to several previous studies, this study uses a dummy variable to measure external assurance (Clarkson et al., 2019; Ioannou & Serafeim, 2019; Kao et al., 2024; Simoni et al., 2020; Uyar et al., 2024). A value of “1” is assigned if the external assurance firm is a Big Four Public Accounting Firm (KAP) or affiliated with one, and a value of “0” is assigned otherwise. The Big Four KAPs consist of Klynveld Peat Marwick Goerdeler (KPMG), Deloitte, Ernst & Young (EY), and PricewaterhouseCoopers (PwC).

Referring to previous research, this study uses several control variables to increase model robustness (Bouteska & Mefteh-Wali, 2021; Cao et al., 2012; Devie et al., 2020; Kouaib et al., 2022; Lel & Tepe, 2021; Mobbs et al., 2021; Rudyanto & Pirzada, 2020; Schiehll & Bellavance, 2009). Return on Assets is calculated using the following equation (Bouteska & Mefteh-Wali, 2021; Cao et al., 2012).

ROA = Profit After Tax/Total Assets

Debt to Equity Ratio is calculated using the following equation (Devie et al., 2020; Kouaib et al., 2022; Lel & Tepe, 2021).

DER = Total Debt/Total Equity

Company size is measured using the total assets’ natural log (LN) (Mobbs et al., 2021; Rudyanto & Pirzada, 2020). The number of board members measures board size, while audit committee size is also measured by the number of audit committee members (Armstrong et al., 2015; Deslandes et al., 2020; Kovermann & Velte, 2019; Lee et al., 2021; Wahab et al., 2017).

4. Results and Discussion

4.1. Descriptive Statistics

Table 1. Descriptive Statistics.

Variable	Obs	Mean	Std. Dev.	Min	Max
Tobins	1700	1.378	3.355	0.001	72.601
MBV	1700	2.597	6.718	0.001	99.75
ESG	1700	2.275	0.219	1.48	2.73
Envi	1700	0.693	0.131	0.325	0.925
Soc	1700	0.759	0.086	0.508	0.915
Gov	1700	0.823	0.07	0.563	0.906
EA	1700	0.107	0.309	0	1
EAKAP	1700	0.055	0.227	0	1
KP	1700	0.514	0.5	0	1
KPOWN	1700	0.482	0.5	0	1
KPDD	1700	0.401	0.49	0	1
ROA	1700	3.607	9.901	−44.33	94.36
DER	1700	1.202	1.365	0.002	9.874
Size	1700	27.227	3.366	17.365	33.731
BOC	1700	5.869	0.888	4	7
AC	1700	3.529	0.499	3	4

and

Table 2. Descriptive statistics by year.

	Tobins	MBV	ESG	Envi	Soc	Gov	EA	EAKAP	KP	KPOWN	KPDD	ROA	DER	Size	BOC	AC
2010	0.934	2.368	1.69	0.486	0.61	0.594	0	0	0.571	0.571	0.429	5.503	2.099	26.636	4.857	3.571
2011	0.712	1.764	1.687	0.475	0.621	0.59	0	0	0.667	0.667	0.667	5.32	2.128	27.104	4.889	3.556
2012	0.737	2.083	1.727	0.52	0.614	0.594	0	0	0.6	0.6	0.6	4.364	2.04	25.696	4.8	3.6
2013	0.688	1.516	1.658	0.458	0.607	0.594	0	0	0.7	0.7	0.4	3.95	1.424	27.602	4.9	3.5
2014	2.161	6.284	1.676	0.462	0.62	0.594	0	0	0.833	0.833	0.583	6.938	1.575	28.58	5.083	3.5
2015	1.979	5.845	1.808	0.506	0.648	0.654	0	0	0.538	0.538	0.462	5.127	1.275	28.636	5.077	3.538
2016	2.171	5.344	1.839	0.516	0.668	0.655	0	0	0.526	0.474	0.474	4.942	1.045	28.269	5.158	3.526
2017	1.474	3.868	1.866	0.547	0.666	0.653	0.056	0	0.639	0.472	0.472	2.42	1.345	28.221	5.139	3.556
2018	1.096	2.276	2.087	0.62	0.72	0.747	0.093	0.019	0.5	0.426	0.352	3	1.502	27.819	5.037	3.537
2019	1.028	2.338	2.078	0.611	0.719	0.748	0.163	0.025	0.575	0.537	0.45	2.768	1.568	27.45	5.05	3.563
2020	1.129	2.473	2.103	0.636	0.719	0.748	0.157	0.037	0.612	0.582	0.47	1.013	1.396	27.46	6.067	3.567
2021	1.658	2.981	2.32	0.708	0.769	0.843	0.111	0.046	0.529	0.477	0.4	3.95	1.26	27.199	5.994	3.542
2022	1.42	2.454	2.322	0.712	0.77	0.841	0.113	0.071	0.507	0.48	0.383	4.199	1.1	27.099	6.019	3.518
2023	1.283	2.284	2.401	0.74	0.789	0.873	0.098	0.07	0.454	0.442	0.376	3.572	1.066	27.051	5.991	3.514

present the descriptive statistics for the variables used in this study. Table 1 shows that the average company value is positive. It indicates that Indonesian companies performed exceptionally well throughout the years studied. From 2010 to 2023, company values generally remained fairly good (Table 2). ESG performance averaged 2.275, remaining stable throughout each year of the study (Table 1 and Table 2).

Furthermore, each ESG performance element, consisting of environmental, social, and governance, scored above 0.6. However, Table 2 shows that social is the only element that has reached 0.6 since 2010. The environmental element only reached above 0.6 in 2018, and the governance element in 2015. It indicates increasing corporate awareness of these three elements.

Only around ten percent of new non-financial companies have external assurance. It is undoubtedly a serious concern for stakeholders, especially companies and the government. The Indonesian government needs to establish regulations for external assurance related to ESG reports prepared by companies. Meanwhile, the average number of companies studied has political connections, which undoubtedly presents a unique phenomenon for Indonesian companies. Most Indonesian companies have political connections, which will undoubtedly influence corporate governance.

4.1.1. Pairwise Correlation

Before conducting regression analysis to test the hypotheses, it is necessary to ensure that the research model is free from multicollinearity issues. The pairwise correlation test was conducted and presented in

Table 3. Pairwise correlations.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)	(13)	(14)	(15)	(16)
(1) Tobins	1.000
(2) MBV	0.865 *	1.000
(3) ESG	0.046	−0.008	1.000
(4) Envi	0.042	−0.017	0.833 *	1.000
(5) Soc	0.039	0.034	0.684 *	0.262 *	1.000
(6) Gov	0.017	−0.033	0.737 *	0.421 *	0.424 *	1.000
(7) EA	−0.019	0.014	−0.017	−0.039	−0.003	0.022	1.000
(8) EAKAP	0.002	0.046	0.041	−0.002	0.042	0.082 *	0.695 *	1.000
(9) KP	0.025	0.017	−0.067 *	−0.016	−0.060	−0.107 *	0.044	0.042	1.000
(10) KPOWN	0.024	0.010	−0.062	−0.022	−0.061	−0.078 *	0.046	0.047	0.938 *	1.000
(11) KPDD	0.048	0.039	−0.043	−0.011	−0.040	−0.063 *	0.078 *	0.073 *	0.795 *	0.772 *	1.000
(12) ROA	0.200 *	0.218 *	−0.011	−0.056	0.032	0.033	0.108 *	0.075 *	−0.028	−0.019	−0.015	1.000
(13) DER	−0.086 *	0.079 *	−0.129 *	−0.096 *	−0.088 *	−0.116 *	0.036	0.039	0.076 *	0.068 *	0.078 *	−0.199 *	1.000
(14) Size	−0.003	0.021	−0.042	−0.025	−0.004	−0.080 *	0.052	0.064 *	0.043	0.030	0.065 *	−0.006	0.029	1.000
(16) BOC	−0.007	0.002	0.228 *	0.139 *	0.133 *	0.289 *	0.064 *	0.012	−0.075 *	−0.065 *	−0.061	0.032	−0.036	0.016	1.000
(16) AC	0.048	0.069 *	−0.036	−0.069 *	0.057	−0.053	0.033	0.020	0.022	−0.003	−0.004	0.000	0.042	0.043	−0.039	1.000

* p < 0.1.

. Based on the results, this research model is free from multicollinearity issues. It is based on the absence of coefficient values above 0.8 (Gujarati, 2003).

4.1.2. Regression Results

The regression results of this study are presented in

Table 4. Results of hypothesis regression and robustness test.

	(1)	(2)	(3)	(4)	(5)	(6)
	Tobins	MBV	Tobins	MBV	Tobins	MBV
Intercept	−2.575 *	−8.407 ***	−0.945	−5.545 *	−1.249	−4.378
	(−1.769)	(−2.824)	(−0.788)	(−1.944)	(−0.751)	(−1.391)
ESG	1.559 ***	2.762 ***	0.824 *	1.529	0.809 *	1.499
	(2.684)	(2.820)	(1.782)	(1.499)	(1.714)	(1.442)
KP			−3.048 *	−5.402
			(−1.904)	(−1.310)
ESG × KP			1.427 *	2.416
			(1.948)	(1.345)
EAKAP					−0.043	8.302
					(−0.011)	(0.815)
ESG × EAKAP					−0.216	−3.646
					(−0.113)	(−0.859)
ROA	0.065 ***	0.166 ***	0.065 ***	0.165 ***	0.054 ***	0.123 ***
	(5.230)	(4.644)	(5.224)	(4.655)	(4.787)	(4.746)
DER	−0.106 **	0.639 ***	−0.112 **	0.636 ***	−0.176 ***	0.435 ***
	(−2.277)	(3.749)	(−2.315)	(3.732)	(−3.658)	(2.945)
Size	−0.005	0.017	−0.006	0.016	−0.051 **	−0.072
	(−0.225)	(0.347)	(−0.308)	(0.313)	(−2.184)	(−1.494)
BOC	−0.074	0.057	−0.069	0.056	−0.029	0.123
	(−0.862)	(0.311)	(−0.806)	(0.313)	(−0.346)	(0.748)
AC	0.343 **	0.871 ***	0.330 **	0.852 ***	0.317	0.565 *
	(2.224)	(2.940)	(2.169)	(2.914)	(1.609)	(1.784)
Year	YES	YES	YES	YES	YES	YES
Industry	−	−	−	−	YES	YES
Adj. R2	0.04	0.07	0.04	0.07	0.22	0.36
N	1700	1700	1700	1700	1700	1700

t statistics in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01. Notes: Standard errors are clustered at the firm level.

. The results indicate that ESG performance positively affects firm value, supporting H1 in the Indonesian context. This finding suggests that ESG performance is value-relevant for Indonesian listed firms, confirming stakeholder theory, which emphasizes that companies must consider the interests of multiple stakeholders and create shared value to ensure long-term sustainability. In Indonesia, where corporate activities are increasingly scrutinized by regulators, investors, and the public, widespread stakeholder acceptance plays a critical role in protecting firms from reputational and regulatory risks (Jensen, 2001; Yu & Choi, 2016).

Within the Indonesian institutional environment, ESG practices contribute to competitive advantage by strengthening firms’ legitimacy and credibility in the capital market. Consistent with stakeholder theory, Indonesian firms are accountable not only to shareholders but also to employees, communities, customers, and regulators. Strong ESG performance signals compliance with evolving sustainability expectations in Indonesia, fostering stable relationships with stakeholders and ultimately enhancing firm value. Over the long term, these practices generate both financial and non-financial benefits, including reduced stakeholder conflict and lower exposure to legal and social disputes.

Furthermore, for Indonesian firms, ESG performance facilitates broader access to capital. As ESG awareness among Indonesian and international investors has increased over the sample period, firms demonstrating stronger ESG commitment are more likely to gain investor trust. Higher ESG performance thus improves firm valuation by reducing perceived risk and enhancing investment attractiveness in the Indonesian capital market. This result is consistent with prior empirical findings documenting a positive association between ESG performance and firm value (Yi & Yang, 2024; Si et al., 2019; Cheng & Feng, 2023).

The regression results also indicate that political connections strengthen the positive influence of ESG performance on firm value in Indonesia, supporting H2. This finding aligns with social network theory, which posits that politically connected firms possess greater social capital, including access to policy information, regulatory insights, and strategic resources (Adhikari et al., 2006; Claessens et al., 2008; Faccio, 2010; Marie et al., 2024). In Indonesia, where political–business linkages remain prevalent, politically connected firms tend to enjoy enhanced visibility and legitimacy in the eyes of investors, which amplifies the value relevance of ESG performance.

Within the Indonesian governance environment, political connections influence corporate governance choices and strategic priorities. Politically connected firms may be more inclined to adopt and emphasize ESG practices to signal compliance, manage political legitimacy, and mitigate regulatory and reputational risks. As a result, ESG initiatives undertaken by politically connected Indonesian firms are more strongly rewarded by the market, leading to higher firm value. These findings suggest that political connections do not merely provide access to resources but also shape how ESG information is interpreted by investors in Indonesia.

Furthermore, in the Indonesian context, companies with political connections typically face greater external scrutiny from regulators, media, and the public (Shen et al., 2015). This heightened scrutiny encourages politically connected Indonesian firms to adopt ESG practices more proactively in order to maintain legitimacy, manage political exposure, and sustain stable financial performance and firm value. Moreover, government officials associated with these firms may actively promote investments in environmental and social sustainability, fostering an organizational culture that supports improved ESG performance. Such a context-specific mechanism helps explain why ESG performance is more strongly rewarded by the market when firms possess political connections in Indonesia.

The regression results further reveal that external assurance does not significantly moderate the relationship between ESG performance and firm value in Indonesia, leading to the rejection of H3. Although this study conceptually argues that independent external assurance should enhance the credibility of ESG disclosures and mitigate greenwashing, the empirical evidence does not support a moderating effect of external assurance within the Indonesian setting.

This insignificant result is likely attributable to the limited adoption of external assurance among Indonesian listed companies during the sample period. As of recent years, only a small proportion of firms voluntarily obtain external assurance for sustainability reports, limiting its effectiveness as a market-wide credibility signal. In such a context, investors may place greater emphasis on the ESG scores themselves or on firm characteristics—such as political connections—rather than on the presence of assurance.

From a signaling theory perspective, ESG performance conveys positive information to investors, and external assurance is expected to strengthen this signal by validating the credibility of disclosed ESG information (Quick & Inwinkl, 2020; Uyar et al., 2024). However, in Indonesia, where external assurance remains uncommon and unregulated, its presence may not yet constitute a sufficiently strong or widely recognized signal to influence investor valuation. Consequently, while external assurance conceptually enhances ESG credibility, its moderating role may remain latent until assurance practices become more standardized and institutionalized in the Indonesian capital market.

4.1.3. Endogeneity Test

To mitigate the issue of endogeneity, this study employs a two-stage least squares (2SLS) regression approach using instrumental variables. Two instruments are utilized. The first, is derived from the average ESG performance at both the industry and firm levels. The second instrument is the lagged ESG performance variable. Incorporating lagged explanatory variables can alter the channels through which endogeneity influences coefficient estimates, thereby offering a means to test the robustness of results in models that use current (non-lagged) values.

Table 5. Two-Stage Least Squares & Durbin-Wu-Hausman test.

	(1)	(2)
	First IV	Second IV
Intercept	0.392 ***	0.383 ***
	(3.308)	(3.541)
ESG	−0.007 *	−0.007 *
	(−1.703)	(−1.838)
ROA	−0.009 ***	−0.009 ***
	(−3.064)	(−3.071)
DER	−0.005 ***	−0.005 ***
	(−2.894)	(−2.888)
Size	−0.000	−0.000
	(−0.003)	(−0.027)
BOC	0.000 *	0.000 *
	(1.722)	(1.737)
AC	0.002	0.002
	(0.350)	(0.334)
Adj. R2	0.44	0.56
N	692	692
Durbin (score) chi2 (p-value)	0.5632	0.5571
Wu-Hausman F (p-value)	0.5659	0.5597

t statistics in parentheses. * p < 0.10, *** p < 0.01.

presents the estimation results using the Two-Stage Least Squares (2SLS) approach with two different instruments to address potential endogeneity of the ESG performance variable. The first instrument (First IV) uses industry and firm averages of ESG performance, while the second instrument (Second IV) uses lagged values of ESG. Both approaches aim to obtain more consistent and unbiased estimates due to the possibility of a bidirectional relationship between ESG and the dependent variable.

In the estimation using the first instrument, the coefficient for ESG is −0.007 and is significant at the 10% level (p < 0.10), indicating that an increase in ESG performance is negatively associated with the dependent variable, although the effect is relatively weak. This result remains consistent when using the second instrument (lagged ESG), where the coefficient is also −0.007 and significant at the same level. However, the Adjusted R² increases from 0.44 in the First IV to 0.56 in the Second IV, indicating that the second instrument provides a better explanatory power for the variation in the dependent variable.

Endogeneity was tested using the Durbin (score) and Wu-Hausman tests. The results of both tests show p-values above 0.05, for both the First IV and Second IV. This indicates that there is no strong evidence of endogeneity in the model, suggesting that the use of GLS may already provide reliable estimates. Nevertheless, the use of 2SLS provides additional validation and strengthens the reliability of the findings, especially when the instruments used are valid and relevant. Overall, the estimation results suggest that ESG performance has a negative impact on the dependent variable, which may indicate a trade-off between adherence to sustainability principles and short-term financial outcomes. The findings also show that the use of lagged ESG as an instrument is more optimal in explaining the model, with no serious indication of endogeneity issues.

4.1.4. Robustness Test

We conducted a robustness test by replacing the measurements of the dependent variable. The measurements for the dependent variable were market-to-book value and price-to-book value. The findings of this robustness test are presented in Table 4, which shows a linear relationship with the study’s main findings. Therefore, this study can be concluded as robust.

4.1.5. Additional Analysis

We conducted several additional analyses to deepen the study. The first additional analysis we conducted broke down ESG performance into environmental (Envi), social (Soc), and governance (Gov) elements.

Table 6. Additional analysis using ESG elements.

	(1)	(2)
	Tobins	MBV
Intercept	−3.497	−10.828 **
	(−1.230)	(−2.321)
Envi	1.735 **	1.843
	(2.135)	(1.299)
Soc	1.077	4.422 *
	(1.012)	(1.866)
Gov	3.343	6.034
	(0.940)	(1.237)
ROA	0.065 ***	0.165 ***
	(5.236)	(4.711)
DER	−0.105 **	0.641 ***
	(−2.272)	(3.766)
Size	−0.004	0.018
	(−0.188)	(0.352)
BOC	−0.076	0.052
	(−0.877)	(0.285)
AC	0.359 **	0.852 ***
	(2.062)	(2.773)
Adj. R2	0.04	0.07
N	1700	1700
F-stat	3.855	1.893

t statistics in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01. Notes: Standard errors are clustered at the firm level.

shows that environmental and social performance positively affect company value. This finding is supported by the previously presented data in Table 1 and Table 2, which show that these two elements have long been a concern and are practiced by companies. Furthermore, investors also view companies with good practices and performance in environmental and social aspects, which increases their value. However, an interesting finding is that the governance element did not significantly impact. This finding may be due to the relatively low number of companies disclosing ESG governance elements.

The second additional analysis involved using alternative measures for the political connections variable. The political connections measure is classified into two categories: first, companies politically connected through business owners (KP_OWN), measured using a dummy variable that takes the value 1 if one of the company’s major shareholders (who control at least 5% of the company’s shares) is a current or former high-ranking government official (e.g., a minister, member of the national parliament, or senior military personnel), a member of a political party, or has family ties to politicians, and 0 otherwise. Second, companies politically connected through high-ranking company officials (KP_DD), measured using a dummy variable that takes the value 1 if one of the company’s high-ranking officials (e.g., the chairperson, secretary, board member, or CEO) is a current or former high-ranking government official (e.g., a minister, member of the national parliament, or senior military personnel), a member of a political party, or has family ties to politicians, and 0 otherwise.

Table 7. Additional analysis with alternative measures of political connections.

	(1)	(2)	(4)	(5)
	Tobins	MBV	Tobins	MBV
Intercept	−1.024	−5.889 **	−5.840 **	−0.925
	(−0.858)	(−2.089)	(−2.127)	(−0.799)
ESG	0.875 **	1.718 *	1.686 **	0.851 **
	(1.985)	(1.882)	(2.010)	(2.034)
KPOWN	−3.144 **	−5.037
	(−1.965)	(−1.316)
ESG × KPOWN	1.470 **	2.240
	(1.981)	(1.325)
KPDD			−6.591	−4.196 **
			(−1.496)	(−2.173)
ESG × KPDD			3.076	2.007 **
			(1.571)	(2.238)
ROA	0.065 ***	0.165 ***	0.165 ***	0.064 ***
	(5.219)	(4.644)	(4.616)	(5.175)
DER	−0.110 **	0.638 ***	0.633 ***	−0.113 **
	(−2.289)	(3.743)	(3.695)	(−2.341)
Size	−0.006	0.016	0.008	−0.012
	(−0.310)	(0.310)	(0.148)	(−0.574)
BOC	−0.072	0.051	0.063	−0.067
	(−0.833)	(0.281)	(0.353)	(−0.778)
AC	0.335 **	0.857 ***	0.853 ***	0.332 **
	(2.192)	(2.922)	(2.914)	(2.178)
Year	YES	YES	YES	YES
Adj. R2	0.04	0.07	0.07	0.05
N	1700	1700	1700	1700
F-stat	3.711	1.845	1.898	3.500

t statistics in parentheses * p < 0.10, ** p < 0.05, *** p < 0.01. Notes: Standard errors are clustered at the firm level.

shows that political connections through business owners (KP_OWN) demonstrate a positive or strengthening effect on the relationship between ESG performance and firm value. Politically connected company owners, or those who are themselves politicians, have a strong incentive to maintain a positive image and reputation. It is because they are closely associated with the company, and their name is often identified with it. If they do not practice ESG, the public and investors will be influenced and view the company as unworthy of investment. Politicians who are also company owners are unwilling to see their companies not practice ESG principles. Their reputations are also at risk for running companies that do not prioritize sustainability.

A similar finding was found in measuring political connections, where company executives are politicians or have political connections (KP_DD). Executives who are also politicians or have political connections tend to have a strong incentive to maintain their company’s reputation, which is also their own. They have interests aligned with ESG practices. Politically connected executives are susceptible to public perception because their reputations affect the companies they lead and their political careers. Their support for public-facing environmental, social, and governance issues will help them legitimize themselves through ESG practices. Ultimately, these ESG practices will also increase the company’s long-term value, as they will have a good reputation and be worthy of investment by investors. This investment viability is also linked to the lower likelihood of future socio-political and environmental issues the company may face.

5. Conclusions

This study examines the relationship between ESG performance and firm value in Indonesia, with a particular focus on the moderating roles of political connections and external assurance. Using a panel of Indonesian non-financial firms from 2010 to 2023, the findings indicate that ESG performance is positively associated with firm value. More importantly, the results show that political connections strengthen this relationship, while external assurance does not exert a significant moderating effect within the Indonesian setting.

The positive moderating role of political connections reflects Indonesia’s institutional characteristics, where business–government relationships remain influential. Politically connected Indonesian firms are better positioned to convert ESG engagement into firm value, as such connections facilitate access to regulatory support, public resources, and legitimacy in an environment characterized by uneven enforcement and institutional constraints. In Indonesia, ESG initiatives therefore function not only as sustainability commitments but also as strategic mechanisms to align firms with political and regulatory expectations, thereby enhancing investor confidence and market valuation.

In contrast, the insignificant moderating effect of external assurance suggests that the credibility-enhancing role of ESG assurance remains limited in Indonesia. This result can be attributed to the relatively underdeveloped ESG assurance market, limited differentiation in assurance practices, and the absence of mandatory assurance requirements. As a consequence, the presence of external assurance alone may not be sufficient to meaningfully reduce information asymmetry or alleviate investor concerns regarding symbolic ESG disclosure and greenwashing in the Indonesian capital market.

Rather than offering broad emerging-market generalizations, this study provides context-specific insights relevant to Indonesia. The findings indicate that political connections play a central role in shaping how ESG performance is valued by investors, while the effectiveness of external assurance depends critically on regulatory clarity, market recognition, and enforcement strength. These results underscore the importance of aligning ESG governance mechanisms with Indonesia’s institutional realities to enhance the value relevance of sustainability disclosures.

From a theoretical perspective, this study contributes to the ESG literature by demonstrating that the value implications of ESG performance are highly context-dependent within a national institutional framework. By integrating stakeholder theory, agency theory, and signaling theory, the findings highlight how political connections and assurance mechanisms interact with ESG performance specifically in Indonesia, rather than assuming uniform effects across countries or regions.

From a regulatory standpoint, the results suggest that Indonesian policymakers should not rely solely on voluntary ESG assurance to improve disclosure credibility. Stronger sustainability reporting regulations, clearer assurance guidelines, and more consistent enforcement mechanisms are needed to ensure that ESG disclosures reflect substantive sustainability performance rather than symbolic compliance. For managers, the findings imply that ESG investments can enhance firm value in Indonesia, particularly when aligned with institutional and political realities; however, firms should not assume that external assurance alone will automatically improve market perceptions without broader improvements in disclosure quality.

Finally, this study has several limitations. The analysis focuses on non-financial firms listed in Indonesia, which constrains the scope of inference. Future research may extend this framework by conducting explicit cross-country comparative studies, incorporating alternative ESG measures, or examining how future regulatory reforms in Indonesia—particularly regarding ESG assurance—alter the credibility and valuation effects of sustainability disclosure over time.