ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) IMPACT ON CORPORATE FINANCIAL STRATEGY OF ENERGY AND UTILITIES COMPANIES WORLDWIDE

• Main Author: Febe Christine, Abigail
• Format: Theses
• Language: Indonesia
• Subjects: Manajemen umum
• Online Access: https://digilib.itb.ac.id/gdl/view/80761
• Institution: Institut Teknologi Bandung

The trend of energy usage continues to increase from year to year and is still dominated by oil and coal as the primary sources of energy. Since the main energy sources come from fossil fuels with a high carbon composition, their combustion produces toxic carbon dioxide pollution. In addition to carbon monoxide from other energy sources, various pollutants are also generated. Energy consumption continues to rise with population and civilization growth. The increasing pollution on Earth leads to the greenhouse effect, causing a rise in the Earth's temperature. This phenomenon is known as global warming, raising global concerns and resulting in the Paris Agreement on December 12, 2015, to address the issue of global warming. The Paris Agreement aims to limit the global average temperature increase well below 2ºC above pre-industrial levels, with an aspirational goal to limit the increase to 1.5ºC by the end of this century. Many people are striving to create alternative energy that is cleaner than commonly used energy sources. However, humans will still use fossil energy sources for several years to come due to their greater availability and lower cost compared to new energy sources, which are limited by technology. Faced with pollution issues, energy companies are competing to take responsibility for their pollution and become more sustainable. There is a shift in mindset where companies are not only concerned about profitability but also about being environmentally friendly. Researchers, academics, and decision-makers are increasingly interested in this issue, and the term ESG (Environmental, Social, and Governance) has emerged in global efforts to become more sustainable. However, this raises the question of whether the implementation of ESG in companies has a positive financial impact or otherwise. This research aims to evaluate the influence of the ESG index on the financial strategy of companies, including financial performance, market valuation, and market risk. The study involves 587 energy and utilities sector companies from 55 countries in 2022. The method used is PLS-SEM with SmartPLS 3.2.9 software. PLS-SEM analysis consists of two stages: measurement model analysis to assess the reliability and validity of the model structure used, and structural model analysis to test hypotheses. Two structural models are used, namely the higher and lower order models, to explain in more detail the influence of indicators from the ESG index. The results of the research analysis indicate that the environmental index, which is part of the ESG index, is the most significant indicator in influencing the financial strategy of companies. Additionally, market valuation is the construct most influenced by the ESG index. The findings of this research can provide insights into the impact of the ESG index that can be used by business owners and decision-makers in allocating funds and formulating regulations.