THE EFFECT OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE DIMENSIONS ON FINANCIAL PERFORMANCE: EVIDENCE FROM SMEs FIRMS LISTED ON THE INDONESIA STOCK EXCHANGE ACCELERATION BOARD

Abstract

This study examines the impact of Environmental, Social, and Governance (ESG) dimensions on financial performance of Small and Medium Enterprises (SMEs) listed on the Indonesia Stock Exchange (IDX) Acceleration Board. Using a quantitative approach, this study employs panel data regression analysis on secondary data collected from 18 SMEs over the period 2023–2024, resulting in 36 firm-year observations. ESG performance is measured using a content analysis approach based on disclosure scores for each dimension, while financial performance is proxied by Return on Assets (ROA). Firm size and leverage are included as control variables. The results of the Fixed Effect Model (FEM) indicate that the environmental, social, and governance dimensions do not have a significant effect on financial performance. In contrast, firm size shows a positive and significant effect on ROA, while leverage does not exhibit a significant relationship. These findings suggest that ESG practices in SMEs are still in an early stage and tend to be compliance-driven, thus not yet contributing to financial performance. Additionally, the results highlight that internal firm characteristics, particularly firm size, play a more dominant role in determining financial outcomes. This study contributes to the literature by providing empirical evidence on the ESG–financial performance relationship in SMEs within an emerging market context, particularly those operating under regulatory frameworks such as the IDX Acceleration Board. The findings offer important implications for policymakers, investors, and SME managers regarding the strategic implementation of ESG practices.