The Role of Industry Sensitivity in Moderating The Effect of Environmental, Social, and Governance (ESG) on Financial Distress
Abstract
This study aims to analyze and obtain empirical evidence on the effect of Environmental, Social, and Governance (ESG) on financial distress, and the role of industry sensitivity in strengthening the effect of ESG on financial distress. The research sample selected through purposive sampling consist of 108 Morningstar Sustainalytics rated companies listed on the Indonesia Stock Exchange in 2024. The results of the data analysis utilizing Moderated Regression Analysis (MRA) exhibit that ESG has a significant negative effect on financial distress, suggesting that the higher the ESG performance, the lower the risk of financial distress. However, contrary to the proposed hypothesis, industry sensitivity significantly weakens the negative effect of ESG on financial distress.
Keywords: ESG; Financial Distress; Industry Sensitivity; Z-Score; ESG Rating.
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References
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Altman, E. I. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. In Source: The Journal of Finance (Vol. 23, Issue 4).
Altman, E. I., & Hotchkiss, E. (2006). Corporate Financial Distress and Bankruptcy: Predict and Avoid Bankruptcy, Analyze and Invest in Distressed Debt Third Edition. John Wiley & Sons.
Ameer, R., & Othman, R. (2012). Sustainability practices and corporate financial performance: A study based on the top global corporations. Journal of Business Ethics, 108(1), 61–79. https://doi.org/10.1007/s10551-011-1063-y
Antunes, J., Wanke, P., Fonseca, T., & Tan, Y. (2023). Do ESG Risk Scores Influence Financial Distress? Evidence from a Dynamic NDEA Approach. Sustainability (Switzerland), 15(9). https://doi.org/10.3390/su15097560
Barnett, M. L., & Salomon, R. M. (2011). Does it Pay to Be Really Good? Addressing the Shape of the Relationship between Social and Financial Performance. Strategic Management Journal.
Beaver, W. H. (1966). Financial Ratios As Predictors of Failure. In Empirical Research in Accounting: Selected Studies (Vol. 4).
Beaver, W. H., McNichols, M. F., & Rhie, J. W. (2005). Have financial statements become less informative? Evidence from the ability of financial ratios to predict bankruptcy. Review of Accounting Studies.
Binesh, F. (Nasim), E-Vahdati, S., & Ozdemir, O. (2024). ESG performance and financial distress during COVID-19: the moderating effects of innovation and capital intensity. Asia-Pacific Journal of Business Administration. https://doi.org/10.1108/APJBA-12-2022-0515
Broadstock, D. C., Chan, K., Cheng, L. T. W., & Wang, X. (2021). The role of ESG performance during times of financial crisis: Evidence from COVID-19 in China. Finance Research Letters, 38. https://doi.org/10.1016/j.frl.2020.101716
Bursa Efek Indonesia. (2024). Penjelasan Nilai ESG. Bursa Efek Indonesia (BEI).
Chang, Y. J., & Lee, B. H. (2022). The Impact of ESG Activities on Firm Value: Multi-Level Analysis of Industrial Characteristics. Sustainability (Switzerland), 14(21). https://doi.org/10.3390/su142114444
Cheng, B., Ioannou, I., & Serafeim, G. (2014). Corporate social responsibility and access to finance. Strategic Management Journal, 35(1), 1–23. https://doi.org/10.1002/smj.2131
Choi, S. Y., Ryu, D., & You, W. (2024). ESG activities and financial stability: The case of Korean financial firms. Borsa Istanbul Review, 24(5), 945–951. https://doi.org/10.1016/j.bir.2024.05.007
Dhaliwal, D. S., Li, O. Z., Tsang, A., & Yang, Y. G. (2011). Voluntary nonfinancial disclosure and the cost of equity capital: The initiation of corporate social responsibility reporting. Accounting Review, 86(1), 59–100. https://doi.org/10.2308/accr.00000005
Dimson, J., Mladenov, Z., Sharma, R., & Tadjeddine, K. (2020). COVID-19 and European small and medium-size enterprises: How they are weathering the storm. https://www.mckinsey.com/industries/public-sector/our-insights/covid-19-and-european-small-and-medium-size-enterprises-how-they-are-weathering-the-storm
Field, A. (2024). Dicovering Statistics Using IBM SPSS Statistics (6th ed.).
Freeman, R. Edward. (1984). Strategic Management : A Stakeholder Approach. Pitman.
G. Eccles, R., & Serafeim, G. (2013). The Performance Frontier innovating for a sustainable strategy. https://hbr.org/2013/05/the-performance-frontier-innovating-for-a-sustainable-strategy
Ghozali, I. (2018). Aplikasi Analisis Multivariate dengan Program IBM SPSS 25 (9th ed.). Badan Penerbit Universitas Diponegoro.
Goss, A., & Roberts, G. S. (2011). The impact of corporate social responsibility on the cost of bank loans. Journal of Banking and Finance, 35(7), 1794–1810. https://doi.org/10.1016/j.jbankfin.2010.12.002
Grice, J. S., & Ingram, R. W. (2001). Test of the generalizability of Altman’s bankruptcy prediction model. Journal of Business Research.
Habib, A. M. (2023). Do business strategies and environmental, social, and governance (ESG) performance mitigate the likelihood of financial distress? A multiple mediation model. Heliyon, 9(7). https://doi.org/10.1016/j.heliyon.2023.e17847
Harymawan, I., Putra, F. K. G., Fianto, B. A., & Wan Ismail, W. A. (2021). Financially distressed firms: Environmental, social, and governance reporting in indonesia. Sustainability (Switzerland), 13(18). https://doi.org/10.3390/su131810156
Humphrey, J. E., Lee, D. D., & Shen, Y. (n.d.). The independent effects of environmental, social and governance initiatives on the performance of UK firms.
Iazzolino, G., Bruni, M. E., Veltri, S., Morea, D., & Baldissarro, G. (2023). The impact of ESG factors on financial efficiency: An empirical analysis for the selection of sustainable firm portfolios. Corporate Social Responsibility and Environmental Management, 30(4), 1917–1927. https://doi.org/10.1002/csr.2463
Isayas, Y. N. (2021). Financial distress and its determinants: Evidence from insurance companies in Ethiopia. Cogent Business and Management, 8(1). https://doi.org/10.1080/23311975.2021.1951110
Jo, H., & Harjoto, M. A. (2011). Corporate Governance and Firm Value: The Impact of Corporate Social Responsibility. Journal of Business Ethics, 103(3), 351–383. https://doi.org/10.1007/s10551-011-0869-y
Keeley, A. R., Li, C., Takeda, S., Gloria, T., & Managi, S. (2022). The Ultimate Owner of Environmental, Social, and Governance Investment. Frontiers in Sustainability, 3. https://doi.org/10.3389/frsus.2022.909239
Orji, E. N., & John-Akamelu, C. R. (2023). BOOK TAX DIFFERENCES AND FINANCIAL DISTRESS OF PUBLIC LISTED CONSUMER GOODS FIRMS IN NIGERIA JOURNAL OF GLOBAL ACCOUNTING. In JOURNAL OF GLOBAL ACCOUNTING (Vol. 9, Issue 1). https://journals.unizik.edu.ng/joga
Penjelasan Nilai ESG. (2024). Bursa Efek Indonesia (BEI).
Platt, H. D., & Platt, M. B. (2002) Predicting corporate financial distress: Reflections on choice-based sample bias. Journal of Economics and Finance.
Rastogi, S., Singh, K., & Kanoujiya, J. (2023). Impact of Environmental, Social and Governance (ESG) Engagements on Financial Distress under Competition: evidence from nonfinancial firms listed in India. International Journal of Corporate Governance, 13(1), 1. https://doi.org/10.1504/ijcg.2023.10054845
Sehgal, S., Mishra, R. K., Deisting, F., & Vashisht, R. (2021). On the determinants and prediction of corporate financial distress in India. Managerial Finance, 47(10), 1428–1447. https://doi.org/10.1108/MF-06-2020-0332
Sharfman, M. P., & Fernando, C. S. (2008). Environmental risk management and the cost of capital. Strategic Management Journal, 29(6), 569–592. https://doi.org/10.1002/smj.678
Singh, S., Tejasmayee, P., Singh Gautam, R., & Rastogi, S. (2024). Impact of ESG on Financial Distress in The Healthcare Sector Using Debt-Equity Ratio As A Moderator. 2024 ASU International Conference in Emerging Technologies for Sustainability and Intelligent Systems, ICETSIS 2024, 1533–1538. https://doi.org/10.1109/ICETSIS61505.2024.10459624
Suchman, M. C. (1995). Managing Legitimacy: Strategic and Institutional Approaches. In Source: The Academy of Management Review (Vol. 20, Issue 3).
Wong, W. C., Batten, J. A., Ahmad, A. H., Mohamed-Arshad, S. B., Nordin, S., & Adzis, A. A. (2021). Does ESG certification add firm value? Finance Research Letters, 39. https://doi.org/10.1016/j.frl.2020.101593
Published
2025-06-30
How to Cite
LUTHFI, Ahmad; ATMINI, Sari.
The Role of Industry Sensitivity in Moderating The Effect of Environmental, Social, and Governance (ESG) on Financial Distress.
E-Jurnal Akuntansi, [S.l.], v. 35, n. 6, june 2025.
ISSN 2302-8556.
Available at: <https://ojs.unud.ac.id/index.php/akuntansi/article/view/125194>. Date accessed: 13 july 2025.
doi: https://doi.org/10.24843/EJA.2025.v35.i06.p07.
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