Unveiling The Role of ESG in Mitigating Firm Idiosyncr atic Risk: Evidence from Indonesia

Purpose: This study investigates the impact of Environmental, Social, and Governance (ESG) disclosure on idiosyncratic risk among non-financial companies listed on the Indonesia Stock Exchange (IDX) during the period 2016-2022. Design/methodology/approach: This study examines the effect of ESG disclosure on idiosyncratic risk, focusing on non-financial firms listed on the Indonesia Stock Exchange. Financial sector firms were excluded due to their distinct regulatory environment and reporting standards. A purposive sampling method was applied to select 58 companies from a total of 107 ESG-reporting firms, resulting in 406 firm-year observations. Idiosyncratic risk was calculated using the Fama-French Three-Factor Model (FFTFM), and ESG disclosure scores were obtained from the Bloomberg database. Panel data regression analysis was used to examine the relationship between ESG disclosure and idiosyncratic risk. Findings: The findings reveal a significant negative relationship between overall ESG disclosure and idiosyncratic risk, indicating that companies with higher ESG scores experience lower firm-idiosyncratic risks, reflecting improved risk management. However, when analysed individually, the Environmental, Social, and Governance components did not significantly affect idiosyncratic risk, suggesting that an integrated ESG approach is more effective in mitigating company idiosyncratic risk than its individual dimensions. Research limitations/implications: The study focuses only on non-financial firms listed in Indonesia Stock Exchange that disclosed ESG scores on Bloomberg, which may limit generalizability to other sectors or regions. Originality/value: This study contributes to the ESG and risk management literature by providing empirical evidence from an emerging market context and emphasizing the superiority of integrated ESG strategies over isolated ESG efforts in reducing idiosyncratic risk.