Evaluating the impact of ESG on financial risk: the moderating effects of operational ability and profitability in Indonesian infrastructure firms

Purpose This study aims to examine the impact of environmental, social, and governance (ESG) practices on financial risk, with operational ability and profitability as moderating variables, within the infrastructure sector in Indonesia. Design/methodology/approach The sample consists of 14 infrastructure companies listed on the Indonesia Stock Exchange over the period of 2020–2022, resulting in a total of 42 firm-year observations. The study employs a random-effects model for panel data regression analysis to test the hypotheses. ESG serves as the independent variable, financial risk as the dependent variable, and operational ability (measured by total asset turnover) and profitability (measured by return on assets) as moderating variables. Findings The results reveal that ESG practices have a significant positive impact on financial risk. Furthermore, operational ability negatively moderates the relationship between ESG and financial risk, while profitability positively moderates this relationship. These findings suggest that although higher ESG scores may elevate financial risk due to associated costs and uncertainties, firms with greater operational efficiency and profitability are better equipped to mitigate and manage these risks more effectively. Research limitations/implications This study focuses on infrastructure companies in Indonesia, which may limit the generalizability of the findings to other sectors or geographic regions. Future research could broaden the scope by incorporating diverse industries and cross-country contexts to enhance the robustness and applicability of the results. Practical implications The findings offer valuable insights for policymakers and corporate managers. Policymakers can develop frameworks to encourage sustainable practices without imposing excessive financial burdens on companies. Managers can leverage operational efficiency and profitability to integrate ESG practices effectively, thereby balancing sustainability goals with financial performance. Originality/value This study contributes to the scarce literature on the moderating effects of operational ability and profitability on the relationship between ESG practices and financial risk, particularly in the context of the infrastructure sector in Indonesia.