The Effect of Green Investment on Banking Risk in Indonesia: The Role of Profitability as a Mediating Variable

Abstract

This study analyzes the relationship between Green Investment and banking risk in Indonesia and evaluates the role of profitability as a mediating variable. Banking risk is measured using Non-Performing Loan (NPL) for credit risk and stock beta for market-based systematic risk, while profitability is determined through Return on Assets (ROA). This study uses a balanced panel dataset of 18 banks listed on the Indonesia Stock Exchange for 2021–2025, comprising 90 observations. Green Investment is measured based on the ratio of green financing to total credit, and the control variables used include Firm Size, CAR, and LDR. The analysis was conducted using panel data regression, with model selection through the Chow, Hausman, and Lagrange Multiplier tests, alongside robust standard error estimation. The mediation test employed the Baron and Kenny approach, the Sobel test, and a bootstrap with 1,000 replications. The results indicate that Green Investment has a negative but insignificant relationship with ROA, and a positive but insignificant relationship with NPL. In the stock beta model, Green Investment shows a positive and individually significant coefficient; however, the overall model is insignificant, and the robustness test using return volatility also yields insignificant results. ROA does not mediate the relationship between Green Investment and either NPL or stock beta, as the 95% bootstrap confidence intervals include zero. Overall, Green Investment has not yet been proven to reduce banking risk through increased profitability, while its relationship with market-based systematic risk remains sensitive to the proxies used.