THE EFFECT OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) DISCLOSURE ON MARKET RETURNS

Investors consider many factors before they invest their money. One of the
factors is market returns. Market returns are influenced by internal factors
(financial performance, management, etc.) and external factors (global economy,
regulations, etc). ESG is also one of the external factors that can influence market
returns. It impacts company performance and stock returns, indirectly affecting
the global economy. This study aims to re-evaluate the impact of ESG disclosure
on market returns, addressing inconsistencies in previous research. This study
differs from prior research by utilizing absolute and risk-adjusted returns to
measure market returns and using the IDXESGL index as the sample.
The ESG Disclosure measurement was done using the Environmental
Social Governance Disclosure Index, based on GRI 300 for the environment, GRI
400 for the social, and GRI 102 for the governance; the Market Returns
measurement was done using absolute and risk-adjusted returns. The theory used
in this study is a signal theory. The existence of good ESG reporting from a
company will signal for investors to invest their shares in that company because,
with a high ESG score, investors already predict low investment risk and high
stock returns in the future.
The study found that ESG disclosure positively impacts market returns,
both in absolute returns and risk-adjusted returns. This information can serve as a
signal for investors, indicating a company's commitment to sustainable practices,
potentially leading to improved financial performance, higher returns, and reduced
investment risk. The study suggests that companies should prioritize adequate,
active, and transparent ESG disclosure and implement sustainable business
practices to gain a competitive edge in the market.
The research has limitations with a small sample size of only 16
companies from the IDXESGL index. Future studies should expand the sample by
including companies from other indexes with similar characteristics to improve
representativeness. Furthermore, comparing listed and non-listed companies can
offer valuable insights into their similarities and differences, deepening our
understanding of factors related to index listing.
Keywords : Absolute Return, Risk-Adjusted Return, ESG Disclosure,
IDXESGL companies, Market Returns