Impact of environment performance on firm value: Evidence from Indonesia

Abstract

Environmental policy is a way to mitigate the effects of climate change. However, the impact of complying with these policies on companies is still a matter of debate. This study examined the effect of environmental performance on firm value mediated by financial performance. This quantitative research used the purposive sampling method to select the sample. The sample comprised 95 non-financial companies with an observation period from 2017 to 2021. The panel data was tested using path analysis in SEM-STATA. The results show that financial performance partially mediates the effect of environmental performance on firm value. Environmental performance can also have a direct impact on firm value. The result indicates that investors consider factors other than financial performance when making investment decisions. The results also show that environmental performance positively impacts financial performance. Furthermore, financial performance positively impacts firm value. Investors optimally use the non-financial information provided by the company. One type of non-financial information used is environmental performance. Investors are aware of the importance of the company’s concern for the impact of its operations on the environment. Companies that display good environmental performance tend to have a higher level of sustainability, which is profitable for investors. However, implementing strict environmental policies carries the risk that companies will move to countries with looser environmental policies. Developing countries, in particular, still need to overcome many obstacles in the implementation of environmental policies.