Abstract

We investigate the economic consequences of Environmental Social Governance (ESG), based on companies listed on the Indonesia Stock Exchange and Tokyo Stock Exchange over the period 2018 to 2023. Also, our research examines the effect of COVID-19 on this association. We obtain data on ESG, other corporate governance characteristics, and financial data from the Refinitiv Eikon database and their annual reports. To examine the relation between ESG and firm performance, Ordinary Least Square (OLS) regression is applied. We also applied the generalized method of moments (GMM) to address endogeneity problems. The results show that firms with better ESG practices experience positive economic consequences in Japan and Indonesia, as reflected by higher firm performance. The results are also consistent and robust after testing endogeneity issues. Our study provides important implications for investors, policymakers, and academics. First, investors can use ESG implementation as an indicator in investment decisions in both countries. Second, governments can strengthen ESG policies to achieve higher transparency and competitiveness. Finally, it provides empirical evidence on the economic impact of ESG practices in Japan and Indonesia and the influence of COVID-19 on the relationship. We fill a knowledge gap in the literature in Japan and Indonesia regarding the impact of ESG practices on firm performance and risk.