The Effect of Environmental, Social, and Governance (esg) on Financial Performance: The Mediating Role of Financial Flexibility and the Moderating role of Investment ScaleABSTRACT
This study aims to evaluate the effect of Environmental, Social, and Governance (ESG) on a company's financial performance, with financial flexibility as a mediating variable and investment scale as a moderating variable. Research was conducted with a quantitative approach. The focus of the study is on energy and mineral resources sector companies listed on the ASEAN Stock Exchange from 2018 to 2022 with a research sample of 37 companies. This study uses Structural Equation Modeling (SEM) to analyze data taken from annual reports and financial company reports. The results of the research analysis show that ESG has a significant positive impact on financial flexibility, which, in turn, has a significant positive impact on financial performance. In addition, investment scale also moderates the relationship between financial flexibility and financial performance in a significant positive manner. Overall, ESG, financial flexibility, and investment scale simultaneously have a significant positive effect on financial performance, indicating that the integration of good ESG practices and financial flexibility management and investment scale can effectively improve the company's financial performance. These findings suggest that energy and mineral resource companies in ASEAN can enhance financial performance by adopting strong ESG practices, effectively managing financial flexibility, and factoring investment scale into their strategies.
KEYWORDS:
Social Environment; Financial Performance; Financial Flexibility; Corporate Moderation; ESG
RESUMO
O objetivo deste estudo é avaliar o efeito das questões ambientais, sociais e de governança (ESG) no desempenho financeiro da empresa, tendo a flexibilidade financeira como variável mediadora, e a escala de investimento como variável moderadora. Pesquisa com uma abordagem quantitativa. O foco do estudo são as empresas do setor de energia e recursos minerais listadas na Bolsa de Valores da ASEAN de 2018 a 2022, com uma amostra de pesquisa de 37 empresas. Este estudo usa a Modelagem de Equações Estruturais (Structural Equation Modeling, SEM) para analisar dados extraídos de relatórios anuais e relatórios financeiros de empresas. Os resultados da análise da pesquisa mostram que o ESG tem um impacto positivo significativo sobre a flexibilidade financeira, que, por sua vez, tem um impacto positivo significativo sobre o desempenho financeiro. Além disso, a escala de investimento também modera a relação entre a flexibilidade financeira e o desempenho financeiro de forma positiva e significativa. De modo geral, o ESG, a flexibilidade financeira e a escala de investimentos têm simultaneamente um efeito positivo significativo sobre o desempenho financeiro, indicando que a integração de boas práticas de ESG, a gestão da flexibilidade financeira e a escala de investimentos podem melhorar efetivamente o desempenho financeiro da empresa. Essas descobertas sugerem que as empresas de energia e recursos minerais da ASEAN podem melhorar o desempenho financeiro adotando práticas sólidas de ESG, gerenciando com eficácia a flexibilidade financeira e levando em conta a escala de investimentos em suas estratégias.
PALAVRAS-CHAVE:
Ambiente social; desempenho financeiro; flexibilidade financeira; moderação corporativa; ESG
1. INTRODUCTION
The 2030 Agenda for Sustainable Development, adopted by all Member States of the United Nations in 2015, provides a blueprint for achieving peace and prosperity for people and planet, now and in the future - containing 17 Sustainable Development Goals (SDGs), which are an urgent call to action by all developed and developing countries in global partnership. Heads of state and government agreed that ending poverty and other deprivation must go hand in hand with strategies that improve health and education, reduce inequalities, and spur economic growth - while also addressing climate change and working to conserve oceans and forests. The SDGs follow on from the Millennium Development Goals (MDGs), which have yet to be fully achieved. Starting from a long-term effort that began with the 1992 Earth Summit in Rio de Janeiro, the 2000 Millennium Summit in New York, the 2002 World Summit on Sustainable Development in Johannesburg - South Africa, 2006, 2012 and most recently, the 2015 UN Conference, which produced the SDG Document consisting of 17 goals, 169 targets, and 232 indicators (Department of Economic and Social Affairs - United Nations, 2023).
Empirical research to date suggests that measuring corporate engagement on the SDGs is associated with several methodological challenges, particularly related to indicator selection, data availability, and interpretation or attribution of results. This is despite initiatives aimed at mapping current business indicators to the SDGs, helping companies engage with the SDGs and incorporate them into their practices (Fleming et al., 2017; Lior et al., 2018). Therefore, efforts to date to address how companies can effectively measure their contribution to the SDGs have yielded conflicting results. Measuring the impact of corporate sustainability performance on the SDGs is one technique for evaluating how well companies are doing in achieving the SDGs, as it shows how their sustainable practices and operations contribute to the goals. Empirically, corporate sustainability performance has been widely measured in the literature using Environmental, Social and Governance or ESG scores (Tamimi & Sebastianelli, 2017). ESG practices and disclosures create value for corporate investors, stakeholders, and society by reflecting voluntary commitments to non-financial goals and sustainable development (Arayssi et al., 2019). Users can easily access information about a company’s sustainability performance with the help of ESG scores. However, it is difficult for companies to explain how their ESG initiatives directly support the SDGs and their specific targets, given the linkage between the scores and the SDGs.
Many companies have started to aggressively incorporate ESG disclosures into their financial statements. Globally, Asia Pacific (89 %) has become the most significant region publishing sustainability reports, followed by Europe (82 %), the Americas (74 %), and the Middle East and Africa (56 %) (KPMG, 2022). The Association of Southeast Asian Nations (ASEAN), as part of Asia Pacific and consisting of Brunei Darussalam, Cambodia, Indonesia, Lao People's Democratic Republic, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam, has experienced rapid economic growth. Economic development focused on industrialization has brought environmental impacts (water pollution, natural resource extraction, and poor sanitation) to be a major challenge that must be addressed by AMS. In addition, global environmental issues can significantly cause a major situation in this region, namely climate change.
In support of ASEAN’s high-level commitment to sustainability, the ASEAN Capital Markets Forum (ACMF) launched the ASEAN Green Bond Standard in 2017 and, subsequently, the ASEAN Social Bond Standard and the ASEAN Sustainable Bond Standard in 2018. The ACMF documents map out a possible pathway towards sustainability from 2020 to 2025, in line with the Paris Agreement and the UN SDGs, and provide recommendations on how ASEAN can collaborate to promote sustainable finance and support ASEAN’s transition to a low-carbon economy.
The United Nations Development Programme, International Finance Corporation, and IPIECA (2017) have collaborated to develop a shared understanding of the SDG implications for the oil and gas industry, identifying how the industry can effectively contribute to each SDG by integrating it into core business operations and by identifying opportunities for oil and gas companies to collaborate with other stakeholders. United Nations Environment Programme (2020) explains that the minerals and metals industry also plays a central role in the global economy and will continue to provide the raw materials we need for industrial processes and everyday use. However, the extraction of these mineral resources comes at a high cost, including damage to wildlife and ecosystems. The minerals and metals industry has the potential to support countries in achieving the SDGs, but, based on a study by S&P Global Ratings (2019), ESG risks in the oil and gas and minerals and metals industries are the highest compared to other industries.
Research on ESG and performance in the energy and mineral resources sector is based on the increasing responsibility of companies towards the environment. Studies show that concern for decarbonization results in good financial performance for investors and companies. Researchers (Cheema-Fox et al., 2021; Eckerle et al., 2020; França et al., 2021; Ghosh & Gupta, 2022). Cheema-Fox et al. (2021)) identified several decarbonization strategies in stock portfolios of US and European listed companies during the period 2009-2018. The portfolios included companies from sectors with high CO2 emissions as well as from sectors with lower emissions. The results show that decarbonization strategies increase investor returns, with results being more pronounced for European countries compared to the United States. Studies by In et al. (2017) and França et al. (2021) concluded that companies that carry out carbon efficiency or implement decarbonization strategies have a positive impact on the company's financial performance.
Several empirical studies analyze the impact of ESG indicators on financial performance measures as well as sustainability performance, including De Lucia et al. (2020) , investigating whether ESG initiatives affect the financial performance of public companies in Europe, and Ahmad et al. (2021) who examined the impact of ESG indicators on the financial performance of companies in the UK across 10 types of industries and analyzing how the combination of ESG indicators impacts market value and earnings per share on the Company's financial performance.
In recent years, attention to Environmental Social Governance (ESG) has been increasing among companies, investors, and other stakeholders. Many companies are trying to integrate ESG practices into their business strategies, hoping to improve their financial performance. However, despite ESG’s potential to provide added value, the relationship between ESG performance and financial performance is still debated in the academic literature. This phenomenon suggests a need to understand how ESG practices can affect a company’s financial performance, especially in the energy and mineral resources sector. This sector is experiencing significant pressure to adapt to environmental and social demands, in line with the increasing awareness of the importance of sustainability. Thus, this study focuses on analyzing the impact of ESG on financial performance, considering the role of financial flexibility as a mediating variable and investment scale as a moderating variable. Through this approach, it is expected that this study can provide deeper insight into the mechanisms by which ESG affects financial performance, as well as the factors that can strengthen or hinder the relationship. Thus, the results of this study are expected to provide significant contributions to both academics and practitioners in developing more effective sustainability strategies.
In recent years, attention to Environmental, Social, and Governance (ESG) practices has increased significantly among companies. Data from KPMG (2022) shows that 89 % of companies in Asia Pacific now publish sustainability reports, making it the region with the highest percentage of such reports published. Many companies have begun to aggressively integrate ESG disclosures into their financial statements. This shows that companies are not only committed to financial gains but also strive to fulfill their social and environmental responsibilities. Thus, ESG disclosure has become an important aspect of modern business strategy that has the potential to increase investment attractiveness and stakeholder trust.
According to stakeholder theory, ESG practices enhance stakeholder trust. support, and investment efficiency through several mechanisms. First, good ESG performance reduces agency costs by demonstrating effective corporate governance and reducing the negative impact of media coverage, thereby improving investment efficiency (Kim & Lee, 2020; Matten & Bulan, 2008). Second, ESG disclosure helps mitigate funding constraints by conveying non-financial information that facilitates external funding and improves monitoring (Dinarjito, 2024; El Ghoul et al., 2011; Kim et al., 2022). Third, ESG provides positive signals that reduce information asymmetry between firms and investors and improve investment efficiency (Spence, 1973; Lins et al., 2017). Studies in Korea show that superior ESG performance builds stakeholder trust, which helps firms during crises (Hwang et al., 2021). However, results from different studies show inconsistent relationships between ESG and financial flexibility, with some studies suggesting that ESG investment can reduce a firm's profitability and market value (Zhang & Liu, 2022; Artiach et al., 2010; Friedman, 1970). Zhang and Liu (2022) found that ESG performance enhances financial flexibility by strengthening stakeholder relationships and enhancing organizational legitimacy. Researchers recommend further investigation into the impact of financial flexibility on financial performance and the role of investment scale as a moderating variable in the relationship between ESG and financial performance.
2. LITERATURE REVIEW
The results of previous contextual and empirical research are used as the basis for developing a conceptual model for the research. The following presents the relationship between the variables used in the research: ESG, Flexibility finance, scale investment and performance finance.
2.1 Impact of ESG on Financial Performance
A company can achieve success through good governance and strong relationships with society and the environment, where ESG scores play an important role in sustainable strategies and affect financial performance. A study by La Torre, Leo, and Panetta (2023) showed that, out of 33 studies in the banking industry, 59 % found a positive relationship between ESG Performance (ESGP) and Corporate Financial Performance (CFP), while 41 % showed a negative, mixed, or no relationship. The CFP metrics used include Tobin's Q, ROA, and ROE. A study by Gholami et al. (2022) found that ESG disclosure in US companies (2010-2018) showed a positive relationship with financial performance, especially in profitability, and this effect was stronger in the financial industry. Good ESG disclosure has been shown to be attractive to investors and supports long-term profits. This study recommends that companies improve ESG disclosure and integrate sustainable practices to maximize financial performance and gain long-term profits.
A Study about the influence of ESG on Financial Performance has Lots conducted by researchers, with results study in a way general state that ESG has an effect that is positive and significant on Financial Performance (Gholami et al., 2022; Ismail et al., 2022). In research This the hypothesis proposed that ESG will Improve Financial Performance:
The connection between financial performance and Environmental, Social, and Governance (ESG) performance has been the subject of numerous studies. Empirical research generally shows that ESG practices significantly and favorably affect the financial performance of corporations (Gholami et al., 2022; Ismail et al., 2022). The current study puts forth the theory that ESG performance enhances financial performance in light of this data.
H1: ESG is positive significant on Financial Performance
2.2 The impact of ESG on Financial Flexibility
A company's ESG has become important information to attract market attention and even change investors' investment strategies. When good ESG performance information from a company is obtained, interpreted, and evaluated by the market, its value can be discovered and invested by more creditors or investors. Thus, good ESG performance information will bring capital inflows to the company, thereby increasing the company's internal cash reserves and funding capabilities, thereby increasing the company's financial flexibility. Therefore, there is a correlation between ESG performance and financial flexibility (Gamba & Triantis, 2008; Zhang & Liu, 2022).
Previous research has found an inconsistent relationship between ESG performance and corporate profitability. In emerging markets, adding ESG factors can significantly improve investment performance. In contrast, mature markets with strong institutions and low ESG risk show comparable results for ESG and non-ESG investments.
Environmental uncertainty moderates the relationship between corporate ESG performance and financial flexibility, particularly in volatile markets. ESG serves as a buffer against adverse shocks and protects competitive advantage. Market attention enhances the transmission of ESG information in capital markets, thereby increasing its impact on business performance, particularly in high-attention scenarios.
Improving financial flexibility is critical for businesses to meet future capital needs and capitalize on growth prospects. Strong ESG performance is positively correlated with increased financing capacity and flexibility, as well as investor confidence.
The findings show that, while ESG ratings had no significant impact on performance in early 2020, in the second quarter, high ESG ratings were associated with lower stock performance compared to lower-rated peers. Companies with significant financial flexibility generated abnormal returns in the second quarter, highlighting their value in a volatile market.
Zhang and Liu (2022) stated that ESG has an impact positive significant tofinancial flexibility. The company must increase financial flexibilitytoovercome an increasingly challenging environment. No determined. Research Thus, the submitted hypothesis is that ESG will increasefinancial flexibility.
H2: ESG is influential and of positive significance to Financial Flexibility
2.3 The Impact of Financial Flexibility on Financial Performance
Managers, shareholders, lenders, and government authorities all place high value on firm performance and sustainability. Studies have yielded conflicting results, suggesting that while increased leverage initially improves firm performance, excessive leverage can lead to decline. During financial crises, highly leveraged firms lose market share, which is exacerbated by the positive correlation between financial distress and leverage. This relationship suggests that increased leverage increases the likelihood of financial distress, thus affecting business performance (Boulding & Kirmani, 1993). Financial flexibility has emerged as an important component that positively impacts firm performance, particularly in the mature phase, but its impact differs between growth and static periods. Studies from multiple locations have repeatedly shown that financial flexibility improves firm performance (Hooshyar et al., 2017; Ma et al., 2015; Ma & Jin, 2016). Empirical research shows that organizations with sufficient financial flexibility can effectively address financial challenges, especially in underdeveloped financial markets where cash flow security is critical for future stability and growth (Al-Slehat, 2019; Ali & Siddiqui, 2020).
H3: Financial Flexibility has an impact on Financial Performance
2.4 Impact of Investment Scale on Financial Performance
Research shows that larger investment scales can increase production capacity, expand market share, and enhance innovation, which in turn will contribute to the improved financial performance of firms. For example, research by Choi and Lee (2018) found that firms with higher investment scales showed significant improvements in financial performance because they could take advantage of economies of scale and improve operational efficiency. In addition, research by Brigham and Ehrhardt (2016) stated that larger investments in fixed assets and expansion projects could increase long-term revenue and profitability of firms, supporting the hypothesis that investment scales have a positive effect on financial performance.
H4: Investment Scale is influential on Financial Performance
2.5 Impact Social Governance Environment to Financial Performance Moderated by Investment Scale
Previous studies have shown that the influence of Environmental, Social, and Governance (ESG) on financial performance can be influenced by other factors such as investment scale. Research by Fernández-Feijoo et al. (2014) found that companies that adopt good ESG practices tend to have better financial performance when supported by large investments, because larger investments can strengthen the positive impact of ESG by increasing the capacity to implement and utilize sustainability practices. In contrast, research by Kumar et al. (2016) showed that investment scale can moderate the impact of ESG, where companies with lower investments may not experience the same increase in financial performance compared to companies that make significant investments. These findings suggest that investment scale can affect how effective ESG is in improving financial performance.
H5: Social Governance Environment is influential on Financial Performance and is moderated by Investment Scale
2.6 Impact Influence Social Governance Environment to Financial Performance Through Financial Flexibility
When using the method mediator testing as proposed by (Baron & Kenny, 1986) in 1986, it was found that financial flexibility has significant and positive influence on investment and performance company. More importantly again, scale investment and efficiency play a partial role in mediation,but role scale investment is larger compared to efficiency investment. The result helps us understand why listed companies in Chinanotice more expansion in investment than efficiency in investment. Better performance tall . This is especially driven by the increased scale investment compared to focus on improvement efficiency investment. This is the trend that drives the growth economy in China. However, it's time for makert policy to consider how to design policies that encourage more investment efficient compared to expansion scale in pure investment (Ma et al., 2016).
H6: Governance Environment is influential on Financial Performance through Financial Flexibility
3. METHOD
This study employs a quantitative research design with a causal approach and uses Structural Equation Modeling (SEM) as the analytical method. The objective of this study is to examine the influence of Environmental, Social, and Governance (ESG) performance on financial performance, with financial flexibility acting as a mediating variable and investment scale as a moderating variable.
The population of this study consists of companies listed on the stock exchanges in ASEAN countries that have published their annual reports. The sample was selected from companies that met the inclusion criteria, namely being listed on the stock exchange and having complete data related to ESG, financial performance, financial flexibility, and investment scale. The sampling technique used in this study was purposive sampling based on these criteria. Based on the selection process, the final research sample consisted of 37 companies in the energy and mineral resources sector listed on ASEAN stock exchanges.
Data for this study were collected from two main sources: primary data and secondary data. Primary data were obtained through structured questionnaires designed to gather information related to ESG practices, financial flexibility, and investment scale. Meanwhile, secondary data were collected from companies’ annual reports, financial statements, and other publicly available data related to corporate financial performance.
The independent variable in this study is Environmental, Social, and Governance (ESG) performance, which is measured using ESG scores or indices that reflect companies’ environmental, social, and governance practices. The dependent variable is financial performance, which is measured using financial ratios such as Return on Assets (ROA), Return on Equity (ROE), and profit margin. The mediating variable is financial flexibility, which is measured using liquidity and solvency ratios. The moderating variable is investment scale, which is measured by the total investment made by the company.
Data analysis was conducted using Structural Equation Modeling (SEM). First, the measurement model was evaluated to test the validity and reliability of the indicators used to measure each construct, namely ESG, financial flexibility, investment scale, and financial performance. Subsequently, the structural model was assessed to: (1) examine the direct effect of ESG on financial performance, (2) analyze the mediating role of financial flexibility in the relationship between ESG and financial performance, and (3) test the moderating role of investment scale in the relationship between ESG and financial performance, as well as between financial flexibility and financial performance.
4. RESEARCH RESULT
This study empirically examines the influence of Environmental, Social, and Governance (ESG) performance on financial performance, with financial flexibility as a mediating variable and investment scale as a moderating variable. The analysis focuses on companies in the energy and mineral resources sector listed on ASEAN stock exchanges during the period from 2018 to 2022. In total, 419 companies in the energy and mineral resources sector were listed on ASEAN stock exchanges during this period.
Before proceeding to the stages of Structural Equation Modeling (SEM) using the Partial Least Squares (PLS) approach, the structural model applied in this study is first explained as follows:
Figure 1 illustrates the structural model used in this study. The model includes the variables Environmental, Social, and Governance (ESG), Financial Flexibility (FF), Investment Scale (IS), and Financial Performance (FP). The arrows connecting the constructs and their indicators indicate that the study employs a reflective measurement model. Furthermore, the directional arrows between the latent variables represent the hypothesized relationships examined in this study. The variables tested include ESG as the independent variable, financial performance as the dependent variable, financial flexibility as the mediating variable, and investment scale as the moderating variable.
4.1 Assessing the Outer Model
There are three criteria iused in the data analysis technique with SmartPLS For evaluate Outer Model that is:
4.1.1 Convergent Validity
According to Ghozali (2018), reflective indicators are considered valid when the outer loading value exceeds 0.70 on the construct being measured.
Based on table 1, it can be informed that all indicators of Financial Flexibility (FF), Financial Performance (FP), Investment Scale (IS) and Social Governance Environment (SG) can becalled worthy. All indicators are above 0.70. Here is picture marking the loading factor in the research model (Figure 2):
4.1.2 Discriminant Validity
Discriminant validity is done to ensure that every draft from each different latent variable with variable others. The model has good discriminant validity, if every loading value of every indicator from A latent variables have the largest loading value with other loading values against other latent variables. Test results for discriminant validity were obtained as following.
The diagonal value is the square root value of AVE and the value below it is the correlation between constructs. Seen in table 2, all constructs of the AVE root value are greater from the correlation value between constructs, which means all construction variables have fulfiled discriminant validity.
4.1.3 Composite Reliability
Criteria Reliability can also be seen from mark composite reliability and Cronbach alpha of each variable. Variables own high reliability if the mark composite reliability is above 0.70 and the value cronbach alpha above 0.60. In the table 3, it will be served mark composite reliability and Cronbach Alpha For all over variable.
Based on Table 3, it shows that all variables in the study This produce mark of cronbach alpha value above 0.60 and composite reliability above 0.70 and can concluded in variables study this is reliable.
4.2 Structural Model Testing or Inner Model
Inner Model or Structural Model testing is carried out to see the connection between variables. The value of the structural model research model is evaluated with use r-square. In assessing the model with PLS, it starts with r- square for every dependent latent variable, of Table 5 is results etymation r-square with use SmartPLS.
Based on Table 4 shows mark R-Square For the variable Financial Flexibility (FF) it was obtained of 0.323, and for the variable Financial Performance (FP)it was obtained of 0.568.
4.3 Testing Hypothesis
Significance of the estimated parameters or (P-Values) gives very useful information about connections between variables research. Test results n bootstrapping from PLS analysis as following.
Based on Table 5, which shows the relationship test between variables show that Financial Flexibility has an impact positive on Financial Performance with a mark parameter coefficient of (0.218). The Variable Investment Scale has a positive effect on Financial Performance with a mark parameter coefficient of (0.534). The Variable Social Governance Environment has a positive influence on Financial Flexibility with a mark coefficient of (0.568). The Variable Social Governance Environment has a positive influence on Financial Performance with a mark coefficient of (0.559). The variable Social Governance Environment has a positive influence on Financial Performance, moderated by the variables Investment Scale with amark coefficient as much as (0.576) All variable studied habve the own mark t statistics or t count > t table which is 1.96. So, it can be concluded that the variables studiedown positive andsignificant influence, aqs seen from p- values < 0.050. The results of the influence test No direct or indirect effect can be presented in table 6 below.
Inter-test results influence Social Governance Environment and Financial Performance, mediated by Financial Flexibility, toshow that there exists a positive relationship with the mark coefficient of 0.124 with a mark t-statistic is 2.879 and p-value is 0.000. The t-statistic value is above the top of the t table value is 1.96 and the p value is < 0.050, so can it can be concluded that influence of Social Governance Environment and against Financial Performance is mediated by Financial Flexibility which is a positive and significant influence, as seen from the markers original sample and the value p values.
5. DISCUSSION
Based on the results of the analysis that has been presented above, the following has been related with variables studied, as well as the impact.
5.1 Influence Social Governance Environment to Financial Performance
Based on the path coefficients table, which explains results the analysis research and showsthat Social Governance Environment has apositive and significant influence on Financial Performance. The original sample value of 0.559 and the calculated t value of 5. 455 > t table 1.96 with p-values 0.001 < 0.050. Bansal et al. (2021) identified three streams of research in this debate. Each stream argues that the correlation between ESG and financial performance is different - positive, negative, or insignificant. Experts in the first stream of research (positive correlation) argue that taking socially and environmentally responsible actions does not require large costs and that companies can gain financial benefits from their social and environmental responsibilities. The results of this study are in line with those conducted by Velte (2017) who argued that environmental, social and governance performance (ESGP) has a positive impact on return on assets (ROA) but has no impact on Tobin's Q. In addition, by analyzing three different ESGP components, Governance Performance has the strongest impact on Financial Performance, compared to Environmental and Social Performance. Brooks and Oikonomou (2018) also argue that there is an asymmetry in the financial impact of corporate social performance (CSP), where the negative financial impact of not implementing corporate social responsibility is stronger than the positive financial impact of corporate social responsibility. The form of the relationship between CSP and financial performance (linear or nonlinear and the type of nonlinearity) is unclear. Behl et al. (2022) concluded that the relationship between ESG and firm value needs to be more consistent because the literature shows that its impact is very dynamic across countries, industries, and business models. Sustainable practices will generate long-term prospects in various ways, and energy companies should continue to invest in ESG and not expect immediate benefits.
5.2 Influence Social Governance Environment to Financial Flexibility
Based on the results the test described in the path coefficients table,it can be seen that the impact Social Governance Environment has on Financial Flexibility is positive and significant, where the original sample value is 0.568 and the t value is 8.499 > t table 1.96 with p-values or 0.000 < 0.050. The effect of Environmental, Social, and Governance (ESG) on the company's financial flexibility shows that good social and environmental responsibility policies can improve the company's ability to adapt to changing economic conditions and manage financial risks. Effective implementation of ESG can improve the company's reputation and reduce reputational risk, thereby improving financial position and facilitating access to financial resources (Elkington, 1997). A study by Kolk and Pinkse (2005) showed that companies committed to ESG often experience increased financial flexibility because they are better able to attract investors and access capital more easily. This is supported by Brealey, Myers, and Allen (2011) , who emphasized that companies with a good reputation in terms of social and environmental responsibility have a more solid capital structure, allowing them to adapt to market changes and take investment opportunities with more manageable risks. Therefore, a strong ESG not only enhances a company's image but also improves their financial flexibility, which is essential for long-term success.
5.3 Influence Financial Flexibility Against Financial Performance
Based on the results of the test described in table of path coefficients, then can be seen that the impact Financial Flexibility has to Financial Performance is positive and significant, where original sample value of 0.218 and the t value is 4.866 > t table 1.96 with p-values of 0.001. < 0.050 Research results This is in line with the study previously, that, from an agency cost perspective, the flexibility of high finance can trigger t excessive investment (Agha & Faff, 2014). Both show that flexibility financial can damage company performance. The company's significant cash and bank balances, especially when used for prevention and utilization challenges. Excessive cash and bank balances can cause the company's funds to be wasted, whereas source power that is not useful can cause increasing opportunity costs.
Increasing financial flexibility means press impact of governance obligation company, which will also impact negative to performance company. As an important factor,that influences management finance company, and influences Financial Flexibility on Financial Performance depends on the comparative relationship between potential costs and benefits. When potential income exceeds costs, the company will increase backup financial flexibility to increase performance. However, the increase willcarry more in flexibility finance which willreduce company performance when potential income is less than cost.
5.4 Influence Investment Scale Against Financial Performance
Based on the results the test described in the table of path coefficients, it can be seen that that the impact of Investment Scale on is positive and significant, where the original sample value of 0.534 and the t value is 2.871> t table 1.96 with p-values 0.004. <0.050. Baron and Kenny (1986) studied Financial Flexibility which has a significant and positive effect on Investment and Company Performance. Investment scale and investment efficiency both play a partial mediation role, but the role of investment scale is greater than investment efficiency. Likewise, the results of the study by Raza et al. (2021) shows that Financial Flexibility has a direct effect on Company Financial Performance
5.5 Influence Social Governance Environment to Financial Performance Moderated by Investment Scale
Based on the results the test described in the table of path coefficients, it can be seen that the influence of Social Governance Environment on was moderated by Investment Scale, and is positive and significant, where the original sample value of 0.765 and the t value is 5.159> t table 1.96 with p-values 0.001. <0.050. This study reveals that Environmental, Social, and Governance (ESG) has a positive influence on the company's financial performance, with financial flexibility functioning as a mediator in this relationship. Good ESG policies can improve reputation and relationships with stakeholders, increase profitability, and reduce reputational risk (Elkington, 1997; Kolk & Pinkse, 2005). Financial flexibility allows companies to adapt to economic changes and optimize investment opportunities, which in turn improves financial performance (Brealey, Myers, & Allen, 2011). In addition, the scale of investment moderates this relationship, where larger investments can strengthen the influence of ESG on financial performance by increasing competitive advantage but requiring careful risk management (Margolis & Walsh, 2003; Gompers, Ishii, & Metrick, 2003). Thus, effective integration of ESG policies, supported by financial flexibility and appropriate investment scale, can maximize the company's financial performance.
5.6 Influence Social Governance Environment to Financial Performance Through Financial Flexibility
Based on results from the influence test table, no direct effect (indirect effect), shows that Social Governance Environment has a positive and significant effect on Financial Performance through Financial Flexibility. The Original sample value of 0.124 and the calculated t value of 2,879 > t table 1.96 with p-values 0.004 < 0.050. The effect of Environmental, Social, and Governance (ESG) on the company's financial performance can be mediated by financial flexibility, where good ESG policies play an important role in improving financial performance through increased financial flexibility. Effective ESG, including social responsibility and solid environmental policies, can improve the company's reputation, reduce reputational risk, and improve relationships with stakeholders, which in turn optimizes the company's access to financial resources (Elkington, 1997). Research by Kolk and Pinkse (2005) shows that companies that are active in ESG practices often enjoy greater financial flexibility, because they are more trusted by investors and have a more stable capital structure. This financial flexibility allows companies to adapt more easily to economic changes and take advantage of investment opportunities, which contributes to better financial performance (Brealey, Myers, & Allen, 2011). In other words, good ESG policies strengthen firms’ financial flexibility, which further improves their financial performance through better ability to deal with market uncertainties and exploit growth opportunities.
6. CONCLUSION
This study found that Environmental, Social, and Governance (ESG) positively and significantly affects financial flexibility, which in turn has a significant positive impact on corporate financial performance. Financial flexibility serves as an effective mediator in the relationship between ESG and financial performance. In addition, investment scale also acts as a moderating variable that strengthens the relationship between financial flexibility and financial performance in a significant positive manner. These findings suggest that companies in the energy and mineral resources sector in ASEAN can improve their financial performance by integrating good ESG practices, managing financial flexibility effectively, and considering investment scale in their strategies. Overall, the results of the study support the importance of a holistic approach involving ESG, financial flexibility, and investment scale in improving corporate financial performance. This research was conducted limited to energy and mineral companies. Based on this, further research can consider the breadth of other industrial sectors outside the boundaries of this study in order to obtain more complex generalization results. The results of this study can be used as a consideration for the world of industrial practice to focus on Financial Flexibility to bridge the relationship between Environmental, Social, and Governance in improving financial performance. In addition, the results of this study can be used as a consideration for policy makers in determining the direction of policies related to ESG that strengthen financial flexibility in order to accommodate the strength of financial performance so that it will also contribute to the general economy.
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The data that support the findings of this study are available from the corresponding author upon reasonable request.
Source: Smart PLS 3.0 Output Results
Source: Smart PLS 3.0 Output Results