Sustainable Development: How ESG Score Shapes Corporate Risk-Taking in Politically Linked Firms

Joni, Joni and Rapina, Rapina and Kutubi, Shawgat S. (2025) Sustainable Development: How ESG Score Shapes Corporate Risk-Taking in Politically Linked Firms. Business Strategy and Development, 8 (3). ISSN 2572-3170

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Abstract

This study explores how ESG implementation affects the relationship between politically connected boards of commissioners and risk-taking behavior in Indonesia. It aims to understand how these firms' sustainable development, as reflected by their ESG performance, influences their approach to risk management and decision making. We applied ordinary least squares (OLS) regression to investigate these relationships. Political connection data were manually collected based on the company annual report. For the ESG scores, corporate risk, and other financial information from 2018 to 2023 were collected from DataStream. Next, the Generalized Method of Moments (GMM) and lagged variables are utilized to address potential endogeneity concerns. Politically connected firms through the board of commissioners can mitigate corporate risk; this effect is amplified by ESG implementation. Consequently, companies are encouraged to adopt ESG practices to maximize the beneficial influence of political connections. These findings remain robust, even after addressing potential endogeneity problems. This study has implications for business practitioners, policymakers, and academics in the development of ESG regulation in countries with high levels of political connections. Specifically, this study can serve as a reference for creating more transparent governance to support ESG implementation in emerging markets. The findings may also help investors or creditors gain a better understanding of how ESG affects the association between political connections and corporate risks in emerging markets; consequently, better investing and lending decision-making. This study offers originality by highlighting the intersection of political connections and ESG implementation in emerging markets, an area previously underexplored in the literature.

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