When ESG Becomes a Strategic Capability: Governance, Risk Management and Financial Performance in Emerging Markets

Abstract

This study examines whether ESG operates as a strategic capability in Indonesia, an emerging market characterised by evolving sustainability regulation, uneven institutional enforcement and heterogeneous corporate adoption. Drawing on the Resource‐Based View and Stakeholder Theory, the study analyses how ESG risk management, sustainable governance and stakeholder pressure influence financial performance through ESG performance. Data were collected from 133 Indonesian listed firms using senior managers as key informants and were complemented with objective financial indicators obtained from audited financial statements. The model was tested using PLS‐SEM. The findings show that ESG risk management and sustainable governance significantly improve ESG performance, and ESG performance, in turn, enhances financial performance. Sustainable governance also emerges as the strongest internal driver of ESG performance. In contrast, stakeholder pressure does not significantly affect ESG performance. Rather than treating this result only as evidence of weak external enforcement, the paper interprets it cautiously by considering institutional conditions, measurement issues, limited variation in stakeholder pressure and possible model specification effects. The study contributes primarily by providing contextual evidence from Indonesia and by showing that, in this setting, ESG value creation appears to depend more on internally embedded governance and risk‐management capabilities than on external stakeholder pressure.