ESG Performance, Environmental Controversies, and Environmental Investment Expenditures: Their Impact on Corporate Financial Distress Risk in Indonesia

Abstract

This study examines the effects of Environmental, Social, and Governance (ESG) performance, environmental controversies, and environmental investment expenditures on financial distress risk among firms listed on the Indonesia Stock Exchange (IDX). Using balanced panel data from 58 non-financial firms during 2021–2024 (232 firm-year observations), financial distress is measured using the modified Altman Z-Score, while ESG-related variables are obtained from the Refinitiv database. Fixed-effects panel regression with cluster-robust standard errors is employed to test the proposed relationships. The results show that ESG performance does not have a statistically significant effect on financial distress risk. In contrast, environmental controversies significantly reduce Altman Z-Scores, indicating weaker financial conditions and a higher likelihood of financial distress. Environmental expenditures do not exhibit a significant direct effect. Additional analysis reveals that industry environmental risk exposure moderates the relationship between environmental controversies and financial distress. Although environmental controversies remain detrimental to corporate financial health, their adverse impact is less pronounced among firms operating in environmentally sensitive industries, with the marginal effect decreasing from −0.0120 in low-risk industries to −0.0062 in high risk industries. These findings suggest that realized environmental risks exert a stronger influence on corporate financial vulnerability than ESG disclosure scores or environmental spending.