ESG ACTIVITIES AND FINANCIAL STABILITY IN INDONESIAN ESG-LISTED FIRMS: DOES SHARIA-COMPLIANT MATTER?

Imas Hasanah, NIM.: 23208012020 (2025) ESG ACTIVITIES AND FINANCIAL STABILITY IN INDONESIAN ESG-LISTED FIRMS: DOES SHARIA-COMPLIANT MATTER? Masters thesis, UIN SUNAN KALIJAGA YOGYAKARTA.

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Abstract

Companies have an important responsibility to contribute in pursuing and achieving the Sustainable Development Goals (SDGs), introduced by the United Nations. The company's approach used as an opportunity to contribute is engagement in practices that cover environmental, social and governance (ESG) aspects. The purpose of this thesis is to analyze whether ESG activities has an impact on financial stability. In addition, this research wants to know does Sharia-compliant states has an impact on the relationship between ESG activities and financial stability. By using 27 sample of companies during the period 2009-2019, this study estimates a two-step system GMM dynamic panel data model. The findings indicate that Sharia-compliant status exerts a selective and dimension-specific moderating effect on the relationship between ESG activities and financial stability. Although the ESG composite index demonstrates a direct positive association with financial stability, its interaction with Sharia compliance is negative and statistically significant. This suggests that aggregated ESG measures may mask the distinct legitimacy mechanisms that are particularly relevant for Sharia-compliant firms. Further disaggregated analysis reveals that Sharia-compliant significantly strengthens the positive effects of social and governance index on financial stability, reflecting a strong alignment between Islamic ethical principles and stakeholder expectations. In contrast, the moderating effect of Sharia-compliant on environmental index is statistically insignificant to financial stability. Furthermore, these findings have important implications for investors, regulators, and companies in integrating ESG and sharia values into corporate risk management and sustainability strategies.

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