The Impacts of Green Investment and Firm Value: Exploring from the Mediation Role of Sustainability Performance

doi:10.21203/rs.3.rs-5243226/v1

This study empirically analysed the role of sustainability performance in mediating the influence of green investment on firm value.The sample comprises 191 firm-years of energy and basic materials companies listed on the Indonesian Stock Exchange from 2016 to 2022. The research used secondary data sourced from the OSIRIS database, as well as annual and sustainability reports. The direct effect analysis tool and analysis with mediator variables were used with Hayes PROCESS model 4, namely, simple mediation contained in SPSS. The results prove that green investment has a significantly positive effect on firm value and that sustainability performance mediates the effect of green investment on firm value. The practical implication of this study, first, this study provides new insights into the development of stakeholder and legitimacy theories. Second, it proves that stakeholders currently consider sustainability performance to be a mediator from the non-financial side of the company. Third, it is important for companies to focus on aspects that need to be considered while investing. Fourth, this research can provide advice on the importance of sustainability performance in companies as disclosed in their annual or sustainability reports. This study finds a new cycle in which a company’s green investment actions through sustainability performance which are reported in accordance with applicable regulations, produce output, thus increasing firm value.

firm value

green investment

legitimacy theory

sustainability performance

stakeholder theory

Green investment is an important strategic issue in socioeconomic development worldwide. Green investment has developed into a dynamic and important activity for companies seeking to achieve long-term business performance (Zhang and Berhe, 2022). This research is motivated by the fact that companies currently face the important role of external stakeholders in ensuring that investments made by companies impact sustainability (Shanken and Smith, 1996; Warren and Jack, 2018) as an integral element of stakeholder response (Ambec and Lanoie, 2008; Dunk, 1999; Vandermerwe and Oliff, 1990). Stakeholders are increasingly concerned about environmentally ethical corporate behaviour by selectively choosing companies (Heinkel et al., 2001).

This study fills research gap in related literature pertaining to inconsistencies in the research results. Several previous studies have found a significant relationship between green investment and firm value (Chang et al., 2022; Yadav et al., 2016): green investment has the potential to generate high future profits and increase firm value. However, other studies have observed no significant influence between green investment and firm value (Kim et al., 2018): green investment has a differential impact on firm value which depends on the company’s structural characteristics, such as company size, owned industry, and risk. This research is also based on suggestions from previous research by Singh et al. (2017), that is, to take a more holistic perspective regarding firm value using criteria beyond financial measures, including the environment and ethics. The study also follows Chen and Ma's (2021) suggestion to examine the impact of green investment on firm value using external factors without considering internal factors. Therefore, this study measures firm value using mediation from a non-financial perspective.

Environmental issues and climate change are the main challenges facing the global economy. The Sustainable Development Goals (SDGs) are a world development agenda that focuses on global human welfare. The commitment of countries to achieve the set targets is important to ensure that the mission is successful and that development goals can be achieved (Firoiu et al., 2021; Sharif et al., 2023). Indonesia is one of the United Nations member countries that plays an active role in determining targets for the Sustainable Development Goals as stated in the document Transforming Our World: The 2030 Agenda for Sustainable Development. An agenda among the SDGs for 2030 is a shift towards sustainable development based on human rights and equality to encourage social, economic, and environmental development (Horan, 2019). This indicates that the industrial sector in Indonesia must make green investments to implement sustainable development in policies, interventions, and company work programmes. The sample selection in this study is based on energy and basic materials companies in Indonesia because this sector has an urgent need to make green investments related to environmental protection (Liu et al., 2022). Green investment is highlighted in the Sustainable Development Goals (SDGs) agenda (Firoiu et al., 2021; Sachs et al., 2019). International regulations related to green investment are one of the 17 SDGs. Thus, company investment in green projects is essential to contribute to the collective achievement of SDGs (Li et al., 2021). In Indonesia, regulations related to green investment are reflected in Law Number 25 of 2007 concerning Capital Investment, Article 3 Paragraph (1): investment is carried out based on environmentally sound principles, namely the principle of investment carried out while still paying attention to and prioritising environmental protection and maintenance. Thus, green investment is an important decision for companies to pay attention to (Kemp-Benedict, 2018).

This study is novel in that it presents a mediation model based on the caveats in the relevant literature. Previous studies have discussed the effects of green investment on financial performance, which further affects firm value—this represents the mediation role from a financial perspective. Studies have also highlighted the effect of green investment on sustainability performance, which further affects firm value—this represents the mediation role from a non-financial perspective. The mediation model in this study refers to stakeholder and legitimacy theories.

This study empirically analysed the role of sustainability performance in mediating the influence of green investment on firm value. The role of sustainability as a mediator can add to the contribution that stakeholders now emphasise on the non-financial side of the company through sustainability activities carried out by the company in accordance with applicable regulations. Thus, the following research questions are examined: 1) does green investment directly influence firm value, and 2) does sustainability performance mediate the relationship between green investment and firm value?

The structure of this research is systematically organized to provide a comprehensive understanding of the topic discussed. Section 1 present an introduction to the background of the study. Section 2 reviews the literature review and hypothesis development. Section 3 details the data and methodology. Section 4 presents the results of data analysis and discusses the key findings of this study. Finally, section 5 concludes the study, limitations, and future research.

Stakeholders theory featuring legitimation theory

Today, stakeholder demands reflect increasing global concerns regarding weather conditions, natural disasters, and greenhouse gas emissions. Companies are morally obliged to adopt effective environmental performance initiatives to reduce environmental damage (Artiach et al., 2010; Indriastuti and Chariri, 2021). Stakeholder theory requires managers to make strategic decisions and allocate resources in a manner that is consistent with the different claims of stakeholder groups. Green investment activities are carried out by companies in good faith so that they can maintain good relationships with stakeholders, which can increase the company’s firm value by increasing sustainability and financial performances. Green investment carried out by a company is an effort to emphasise good relations between the company and its stakeholders which is based on the concept of benefits to stakeholders in creating sustainability and impacting the company’s firm value.

Companies committed to improving the sustainability performance of their broader stakeholders can increase short-term shareholder benefits. Stakeholder theory states that companies are responsive to the demands of internal and external stakeholders in adopting policies and implementing strategic decisions. Stakeholder theory assumes that a company’s ability to act strategically is in the interest of stakeholders in terms of decision-making.

Meanwhile, companies can make social sacrifices to reflect their concerns for society. Legitimacy theory states that organisations continually try to ensure that they conduct activities in accordance with the boundaries and norms of society (Deegan, 2019). Thus, companies must be socially responsible and accountable to legally operate their businesses (Lu and Taylor, 2016). From the perspective of legitimacy theory, companies tend to choose topics related to their reputation (Meutia et al., 2022). Consequently, the management attaches importance to improving financial reporting quality. The legitimacy theory explains voluntary social and environmental disclosures as a form of corporate communication. The literature related to sustainability performance provides diverse views on its theoretical basis and implications. Companies report their sustainability performance activities to stakeholders to establish their legitimacy, as they seek a licence from the public to operate. Legitimacy theory suggests that a company’s commitment to sustainable performance helps convince various stakeholders of its importance for the common good and gains internal and external legitimacy (Singh et al., 2017).

The legitimacy theory highlights the importance of social norms in promoting corporate sustainability. Green investment is a company’s strategy for gaining and maintaining legitimacy and supporting stakeholders (Indriastuti and Chariri, 2021). According to the legitimacy theory, companies use sustainability disclosures to increase public perceptions of their sustainability performance. Companies with superior sustainability performance have better access to valuable resources and can gain social legitimacy (Bose et al., 2022). Green investment is a good indicator for reducing environmental violations and improving long-term environmental performance (Yannan et al., 2022).

To maintain legitimacy and build a reputation in the market, companies must be more transparent about their sustainability performance initiatives to stakeholders. Although research on the effect of public investment on firm value is inconclusive, companies with better public relations have higher firm value through an increased reputation and greater legitimacy (Singh et al., 2017). Green investment is a method through which companies can gain and maintain credibility. This is because green investing allows businesses to manage their environmental impacts by reducing energy use, carbon emissions, and other negative effects. A company’s reputation and competitive advantage can benefit from green investments (Yannan et al., 2022).

Green investment and firm value

Green investment is an important aspect of corporate investment and is the main measure used by companies to gain competitive advantage. Increasing expenditures on environmental pollution control and adjusting the industrial structure are conducive to improving green economic development indicators. Therefore, companies can gain sustainable competitive advantage by reducing the adverse impacts of business activities on the natural environment. This forms new habits and market competition patterns that automatically limit company production behaviour, gradually improve environmental quality, and make green investment an inseparable part of company investment. Companies that make green investments may have greater competitive market advantages than other companies. Companies will better master green investment technology and related information; therefore, green investment is an important driving force for sustainable development, which ultimately improves financial performance (Chen & Ma, 2021). Based on the stakeholder theory, green investments made by companies emphasise cooperation between the company and stakeholders based on the concept of benefits to stakeholders in creating sustainability and increasing firm value. Green investments can increase competitive advantage, reputation, and firm value (Yannan et al., 2022).

H: Green investment affects firm value

Green investment on firm value through sustainability performance

The relationship between green investment and sustainability performance is based on sustainability performance being the social responsibility of a business, which includes the economic, legal, ethical, and prospective aspects that society receives from the organisation over time. Furthermore, the socioeconomic goal of corporations is to create and distribute wealth and value to all stakeholders without singling out one group over another. Thus, businesses must move beyond the conventional view of profit as their sole goal and emphasise the primacy of socio-environmental values, ensuring that their involvement contributes to the protection of the environment, consumers, and society. Thus, sustainability performance and green investment have a strong relationship. However, few researchers have studied the impact of green investment on sustainability performance. Previous studies have demonstrated that green investment and sustainability performance can be integrated if their goals are aligned. Consequently, green investments and sustainability performance have become inseparable because they serve the same goals. This shows that green investment lowers a company’s marketing costs and increases resource efficiency, allowing it to offer products and services to society while fulfilling its social responsibilities. Green investment promotes environmentally responsible economic development, whereas environmental protection is a social issue. Since the beginning of the industrial revolution, industry and private investors have had a significant impact on people’s lives.

The stakeholder theory focuses on an institutional perspective. This is because the social environment in which a company operates is shaped by stakeholders and its legitimacy depends on fulfilling their expectations. In other words, companies build legitimacy by adapting to stakeholder expectations (Lourenço et al., 2012). Theoretical and empirical evidence predicts a positive relationship between sustainability performance and firm value (Kim et al., 2018).

Based on stakeholder theory, involvement in sustainability performance is seen as a way to resolve conflicts between stakeholders and run a company for the mutual benefit of its stakeholders, including company shareholders (Alsayegh et al., 2023; Choi et al., 2010). The looming threat of environmental disasters has forced policymakers at all levels to collaborate and develop socially responsible corporate policies. In this case, green investment makes a positive contribution and there is a relationship between sustainability performance and firm value (Marhfor et al., 2022). According to the legitimacy theory, green investment is an effort to align company values, policies, and strategies with sustainability performance (based on the company’s non-financial conditions), whereas based on stakeholder theory, sustainability performance is the implementation of a business strategy to create firm value which is based on the strength of stakeholders being significantly related to sustainability performance (Artiach et al., 2010; Bose et al., 2022).

H ₂: Sustainability performance mediates the effect of green investment on firm value.

[Insert Fig. 1 here]

Data, population, and sample

This study incorporated all energy and basic materials companies listed on the Indonesian Stock Exchange from 2016 to 2021. The total population consists of 936 firm-years. Of this total population, 24 firm-years were excluded because they were delisted from the Indonesian Stock Exchange during the same period. Next, the total number of energy and basic materials companies was further reduced to 721 firm-years, by removing incomplete data variables, companies that did not have annual or sustainability reports, or outlier data. Subsequently, the final sample consisted of 191 firm-years (Table 1).

Table 1

Sample Selection of Firm-Years in 2016–2022
Description							Total
Panel A: Distribution selection of sample data Population All energy and basic materials companies companies listed on IDX within 2016–2022							936
Minuses: Delisting companies Companies with incomplete data, unavailable reports, and outliers data							(24) (721)
Total sample firm-years							191
Panel B: Distribution of data by industry and year
Industry	Year							Total
Industry	2016	2017	2018	2019	2020	2021	2022	Total
Energy	2	2	2	6	12	18	21	63
Basic materials	2	2	10	16	25	36	37	128
Total	4	4	12	22	37	54	58	191
GICS: Global Industry Classification Standard Source: Data processed (2024)

[Insert Table 1 here]

Variable operationalization

Dependent variable

Firm value was the dependent variable in this study. Firm value is the stakeholders’ assessment of the company’s current and future performance (Yadav et al., 2016). Tobin’s Q is used as a proxy for firm value. Tobin’s Q is the book value of total assets minus the book value of equity plus the market value of equity divided by the book value of total assets (Abdi et al., 2020). Tobin’s Q was used to measure financial performance because it can capture the value of long-term investments such as intangible assets (Abdi et al., 2020).

Independent variables

The independent variable in this study was green investment. Green investment is a socially responsible investment that adheres to environmental concepts (Zhang and Berhe, 2022). Green investment is a company’s effort to manage environmental problems by reducing the negative impact of business activities on the environment; therefore, green investment can increase competitive advantage, reputation, and firm value. Green investment was measured according to previous studies (Chen and Ma, 2021; Eyraud et al., 2013; Wang et al., 2018; Zheng and Jin, 2023).

$$\:Green\:Investment=\frac{Total\:enviromental\:investment}{Total\:assets\:\:}$$

Mediating variables

Sustainability performance was used as the mediating variable. Sustainability performance is defined as company behaviour that aims to positively influence stakeholders and goes beyond their economic interests (Zhang and Berhe, 2022). Sustainability performance measurement items have been used to assess the mediating role of sustainability performance on corporate green investment and firm value (Zhang and Berhe, 2022). In this study, the measurement items for sustainability performance were economic, social, and environmental aspects which were adapted using the applicable Global Reporting Initiative (GRI) (GRI, 2016). In this study, sustainability performance was measured by an index that reflected the level of GRI content analysis results using a dummy variable with a score of 1 if disclosed and 0 otherwise (Boiral and Henri, 2017; Thuy et al., 2021).

Control variables

The purpose of including control variables was to avoid misspecification of the empirical model used in the research and avoid biased calculation results. Variables that influenced firm value in extant literature were used as control variables in this study: size (Bing and Li, 2019; Bose et al., 2022; Chen and Ma, 2021), leverage (Abdi et al., 2022; Bing and Li, 2019; Chen and Ma, 2021), sales growth (Alsayegh et al., 2023; Marhfor et al., 2022), and lagged Tobin’s Q (Bing and Li, 2019).

a) Firm size (Company size)

Bing and Li (2019), Bose et al. (2022), and Chen and Ma (2021) found that size influences firm vale. Thus, this study predicts that firm size will significantly influence firm value. Mathematically, the size variable was formulated as follows (Bing and Li, 2019; Bose et al., 2022; Chen and Ma, 2021).

$$\:Size=\text{ln}{TotalAsset}_{t}$$

b) Leverage

Abdi et al. (2022), Bing and Li (2019), and Chen and Ma (2021), found an effect of leverage on firm value. This study predicts that leverage significantly influences firm value. Mathematically, the leverage variable is formulated as follows (Abdi et al., 2022; Bing and Li, 2019; Chen and Ma, 2021).

$$\:Leverage=\:\frac{Total\:debt}{Total\:assets}$$

c) Sales growth

Alsayegh et al., (2023a) and Marhfor et al., (2022) observed the influence of sales growth on firm value. This study predicts that sales growth significantly influences firm value. Sales growth is measured using the following formula (Alsayegh et al., 2023; Marhfor et al., 2022).

$$\:Sales\:Growth=ln\frac{{sales}_{t}}{{sales}_{t-1}}$$

d) Lagged Tobin’s Q

Bing and Li (2019) observed an effect of lagged Tobin’s Q on firm value. This study predicts that lagged Tobin’s Q significantly influences firm value. To measure lagged Tobin’s Q, the Tobin’s Q value is used the year before the observation or t-1 (Bing and Li, 2019).

Table 2 displays the variables used in this study along with the definition, data source, and reference of the measurement.

Table 2

Variable Definitions
Variables	Definitions	Data sources	References
Dependent variable Firm Value (FV)	Tobin Q is defined as the book value of total assets minus the book value of equity, plus the market value of equity, divided by the book value of total assets.	OSIRIS database	(Abdi et al., 2020)
Independent variable Green Investment (GI)	$\:Green\:Investment=\frac{Total\:enviromental\:expenditure}{Total\:assets\:\:}$	Annual report and sustainability report	(Chen & Ma, 2021; Eyraud et al., 2013; Wang et al., 2018; Zheng & Jin, 2023)
Mediating variables Sustainability Performance (SP)	Content analysis (GRI G4 for 2016–2018 and GRI Standard for 2019–2022)	Annual report and sustainability report	(Boiral & Henri, 2017; Thuy et al., 2021)
Control variables Firm size (Size)	Natural logarithm of total assets	OSIRIS database	(Bing & Li, 2019; Bose et al., 2022; Chen & Ma, 2021)
Leverage (Lev)	$\:Leverage=\:\frac{Total\:debt}{Total\:assets}$	OSIRIS database	(Abdi et al., 2022; Bing & Li, 2019; Chen & Ma, 2021)
Sales growth (SalesGr)	$\:Sales\:Growth=ln\frac{{sales}_{t}}{{sales}_{t-1}}$	OSIRIS database	(Alsayegh et al., 2023; Marhfor et al., 2022)
Lagged Tobin's Q (LgTQ)	Tobin's Q of the year before observation or t-1	OSIRIS database	(Bing & Li, 2019).
Source: Data processed (2024)

[Insert Table 2 here]

Research methodology

The study used direct influence analysis tools and analysis with mediator variables used in the research with PROCESS Model 4, namely simple mediation (Hayes, 2022) found in SPSS. Following (Hayes, 2022), this study adopted a three-stage procedure from a simple mediation model to estimate the mediating effect of sustainability performance (SP) on the relationship between green investment (GI) and firm value (FV). The first step was to examine whether a causal relationship exists between green investments and firm value. The second step examined whether a significant relationship exists between the independent and mediator variables, estimated using Eq. (1). The third step examined the effect of the independent variable GI on the dependent variable FV when controlling for the mediator SP (estimated using Eq. (2)). The regression models were as follows:

$$\:{FV}_{it}={\beta\:}_{0}+{\beta\:}_{1}{GI}_{it}+\sum\:{Control}_{it}+{\epsilon\:}_{it}$$

1

$$\:{SP}_{it}={\alpha\:}_{0}+{\alpha\:}_{1}{GI}_{it}+\sum\:{Control}_{it}+{\epsilon\:}_{it}$$

2

$$\:{FV}_{it}={\beta\:{\prime\:}}_{0}+{\beta\:{\prime\:}}_{1}{GI}_{it}+{\beta\:}_{2}{SP}_{it}+\sum\:{Control}_{it}+{\epsilon\:}_{it}$$

3

The mediating effect of sustainability performance on the relationship between green investment and firm value was also examined (Fig. 1). The detailed three-step mediation procedure is shown in Fig. 2. Eq. (1) tested the total effect of green investment on firm value (β1): If β1 is significant (otherwise, the analysis is terminated), the process proceeds to Equations (2) and (3), which examined the indirect effect of green investment on firm value mediated by sustainability performance. If both the indirect effects (α1 and β2) and direct effects (β'1) are significant, then a complementary mediation effect exists. Otherwise, if the direct effect (β'1) is insignificant but the indirect effects (α1 and β2) are significant, a competitive mediation effect exists (Hayes, 2022).

[Insert Fig. 2 here]

Descriptive statistics

Descriptive statistics were used to determine the conditions of the data from the research variables. Descriptive statistical calculations were in the form of nominal data, which were descriptively explained based on the processed data (Table 3). The variables in this study consisted of firm value (FV), green investment (GI), and sustainability performance (SP). The control variables in this study consist of firm size (Size), leverage (Lev), sales growth (SalesGr), lagged Tobin’s Q (LgTQ).

Table 3

Descriptive Statistics
Variables	Obs	Mean	Std. Dev.	Min	Max
FV	191	0.818	0.888	0.083	4.603
GI	191	2.075	0.516	0.9	2.804
SP	191	1.721	0.17	1.25	2.062
Size	191	22.331	1.791	17.604	25.857
Lev	191	1.33	1.398	0.007	7.619
SalesGr	191	0.21	0.452	-0.155	4.226
LgTQ	191	0.798	0.926	0.055	7.453
Source: The Processed Secondary Data (2024)

[Insert Table 3 here]

Next, statistical tests were conducted on the correlations between the research variables (Table 4). If the Pearson correlation value is less than 0.05 or 5%, it can be interpreted that the research variables have a weak relationship, and vice versa.

Table 4

Pearson Correlation
Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)
(1) FV	1.000
(2) GI	0.102*	1.000
(3) SP	0.119*	0.185*	1.000
(4) Size	0.008	0.219*	0.147*	1.000
(5) Lev	-0.105*	-0.002	0.057	0.040	1.000
(6) SalesGr	0.057	0.031	-0.075	0.174*	0.005	1.000
(7) LgTQ	0.233*	0.048	0.070	-0.046	-0.073	0.035	1.000
* shows significance at p < 0.01 Source: The Processed Secondary Data (2024)

[Insert Table 4 here]

Based on the results of the Pearson correlation test shown in Table 4, there was no endogeneity between the variables. The above table shows that there was no multicollinearity problem in the model. This is indicated by the coefficient numbers below.

Results

Table 5 presents the test results of Models 1 and 2 for H₁ and H_2, respectively. Referring to the simple mediation model of Hayes (2022), we answer the hypothesis with direct effects for H₁ and indirect effects for H₂. Model 1 was the test result using simple model mediation (Hayes, 2022) without control variables, while Model 2 was the test result using simple mediation (Hayes, 2022) with control variables.

Table 5

Regression Results
	Model 1	Model 2
Constant	0.302 (2.237)**	0.554 (1.085)
GI	0.112 (2.233)**	0.101 (2.047)**
SP	0.213 (2.784)***	0.212 (2.806)***
Size		-0.013 (-0.538)
Lev		-0.019 (-2.659)*
SalesGr		0.118 (1.626)
LgTQ		0.085 (5.938)***
N	191	191
R ²	0.144	0.288
Adj R ²	0.021	0.083
F	7.786	10.955
Mediation effect	Complementary Mediation	Complementary Mediation
^a The estimated coefficient is displayed in the first row, and the t-value of significance is in parentheses.
^b All tests are two-tailed, * if p < 0.01, if p < 0.05, * if p < 0.1.
Source: The Processed Secondary Data (2024)

Model 1 shows that green investment has a direct effect on firm value, and sustainability performance succeeds in mediating the effect of green investment on firm value even without control variables. These results indicate that H₁ and H₂ are acceptable, leading to the conclusion that the mediation effect is complementary. Model 2 shows that green investment has a direct effect on firm value and that sustainability performance successfully mediates the effect of green investment on firm value with control variables. This proves that size and sales growth have no significant effect on firm value, whereas leverage and lagged Tobin’s Q have a significant effect on firm value. These results indicate that H₁ and H₂ are acceptable, leading to the conclusion that the mediation effect is complementary. Therefore, green investment has a direct effect on firm value and sustainability performance successfully mediates the effect of green investment on firm value. Meanwhile, complementary mediation, as a mediation decision indicates that the results of the direct and indirect effects have a significant positive effect in the same direction.

[Insert Table 5 here]

Discussion

The results prove that green investment is a company action, sustainability performance is a company report, and firm value is the output. As a holistic entity, this study succeeded in finding a new cycle in which the actions taken by companies with green investment through sustainability performance which are reported in accordance with applicable regulations, will produce output, namely, increasing firm value.

Thus, green investment has a significant positive effect on firm value. In fact, the results support the stakeholder theory: green investment is currently a need for stakeholders. The company’s response to stakeholder demand reflects increased environmental awareness through green investments. Companies are morally obliged to adopt effective environmental performance initiatives to reduce environmental damage (Artiach et al., 2010; Indriastuti and Chariri, 2021). These results are consistent with those of Chen and Ma (2021).

Furthermore, this study proves that sustainability performance mediates the effect of green investment on firm value. This supports the stakeholder theory which states that companies are responsive to the demands of internal and external stakeholders in adopting policies and implementing strategic decisions. Stakeholder theory suggests that managers must maximise stakeholder welfare and consider sustainability performance as an investment that increases profits (Marhfor et al., 2022). Green investment is an environment-friendly business strategy for gaining and maintaining legitimacy and support from interested parties. The company’s sustainability performance is aimed at promoting long-term profits, and building positive relationships with society and investor trust, thereby enabling the company’s survival (Yoon et al., 2018). In a company with sustainability performance, this shapes investment behaviour (Alsayegh et al., 2023). This indicates that the stakeholder theory plays a role in a company’s ability to act strategically in the interests of stakeholders to make green investment decisions. Companies that understand stakeholder needs through sustainability performance can increase their firm value. Based on the stakeholder theory, involvement in sustainability performance can create firm value with internal stakeholders and maintain value with external stakeholders (Xu et al., 2022). However, companies committed to improving sustainability performance for the benefit of a wider range of stakeholders can increase their short-term benefits.

This research also supports the legitimacy theory. Legitimacy theory expresses green investment in an effort to align company values, policies, strategies with sustainability performance (based on the company’s non-financial conditions). According to the stakeholder theory, sustainability performance is the implementation of a business strategy to create firm value which is based on the strength of stakeholders being significantly related to sustainability performance (Artiach et al., 2010; Bose et al., 2022).

In fact, related to the institutional setting in this research, energy and basic materials companies in Indonesia care that the green investment activities carried out by the company are in good faith, and that if the company has good relationships with stakeholders, it can increase its firm value by increasing sustainability performance. Green investment carried out by a company is an effort to emphasise good relations between the company and its stakeholders which is based on the concept of benefits to stakeholders in creating sustainability and increasing the company’s firm value. From the perspective of the legitimacy theory, companies use sustainability reports to justify their activities to the public as legitimising company activities. In this case, sustainability reports are a means of accountability to company stakeholders and represent the pressure from certain stakeholders (Meutia et al., 2022). This also supports the achievement of SDGs in Indonesia and national regulations related to green investment.

Additional analysis

An additional analysis was conducted by testing the influence of three aspects of sustainability performance based on GRI standards: economic, social, and environmental performance (GRI, 2016). In other words, the GRI reporting framework challenges companies to report the positive and negative aspects of company performance according to a specific list of items classified into three different dimensions: economic, social, and environmental dimensions (Hussain et al., 2018). This test analysed the aspects that have the greatest mediating influence on green investment and firm value.

Table 6 presents the results of the additional analysis using the three models. In Models 1, 2, and 3, we tested the economic, social, and environmental dimensions, respectively. The results show that the social dimension has the greatest mediating influence in the relationship between green investment and firm value compared with the economic and environmental dimensions. The results of this robustness test support the main findings of this study.

Table 6

Additional Analysis Results
	Model 1	Model 2	Model 3
Constant	0.550 (1.073)	0.577 (1.128)	0.581 (1.138)
GI	0.105 (2.109)**	0.106 (2.142)**	0.105 (2.118)**
SP–Ec	0.589 (2.424)**
SP – En		0.461 (2.403)**
SP – So			0.540 (2.812)***
Size	-0.009 (-0.371)	-0.011 (-0.474)	-0.014 (-0.572)
Lev	-0.018 (-2.570)***	-0.018 (-2.629)***	-0.019 (-2.679)***
SalesGr	0.114 (1.570)	0.110 (1.518)	0.119 (1.643)
LgTQ	0.086 (5.952)***	0.086 (5.951)***	0.086 (6.017)***
N	191	191	191
R ²	0.283	0.283	0.288
Adj R ²	0.080	0.080	0.083
F	10.597	10.578	10.962
Mediation effect	Complementary Mediation	Complementary Mediation	Complementary Mediation
^a The estimated coefficient is displayed in the first row, and the t-value of significance is in parentheses.
^b All tests are two-tailed, * if p < 0.01, if p < 0.05, * if p < 0.1.
Source: The Processed Secondary Data (2024)

[Insert Table 6 here]

This study empirically analysed the role of sustainability performance in mediating the influence of green investment on firm value. The sample in this study comprises 191 firm-years of energy and basic materials companies listed on the Indonesia Stock Exchange from 2016 to 2022. The data used in this study were secondary data sourced from the OSIRIS database, annual reports, and sustainability reports. The study used direct influence analysis tools and analysis with mediator variables with PROCESS Model 4, namely simple mediation (Hayes, 2022) found in SPSS.

The results prove that green investment has a significant positive effect on firm value which supports the stakeholder theory, which mentions that green investment is currently a need for stakeholders. The company’s response to stakeholder demand reflects increased environmental awareness through green investments. The results also demonstrate that sustainability performance mediates the effect of green investment on firm value. This supports the stakeholder theory which states that companies are responsive to the demands of internal and external stakeholders in adopting policies and implementing strategic decisions. This indicates that the stakeholder theory plays a role in a company’s ability to act strategically in the interests of stakeholders to make green investment decisions. The results also support the legitimacy theory which reveals that green investment is an effort to align company values, policies, and strategies with sustainability performance (based on a company’s non-financial conditions). Based on this legitimacy theory perspective, companies use sustainability reports to justify their activities to the public and legitimise corporate activities. This research confirms the stakeholder theory and legitimacy theory through the research model.

This study provides both theoretical and empirical contributions. First, it provides new insights into the development of stakeholder theory and legitimacy theory to explain the direct influence between green investment and firm value and the mediating influence of sustainability performance. Second, it proves that stakeholders currently consider sustainability performance to be a mediator from the non-financial perspective. Third, it is important for companies to focus on aspects that need to be considered when investing, not only financial profit information but also non-financial factors. Fourth, this research can provide advice about the importance of sustainability performance (non-financial) in companies which is disclosed in their annual or sustainability reports.

This study has some limitations. First, this research is limited to energy and basic materials companies listed on the Indonesian Stock Exchange. Future research could be conducted by expanding the sample industry. Second, this research is limited to the commonly used stakeholder and legitimacy theories. Future research should explore the relationship between sustainability performance and other financial accounting theories. Third, this study used simple mediation (Hayes, 2022) to determine the direct, indirect, and total effects of the research variable. Future research could explore this by comparing mediation results (Hayes, 2022) with other mediation results to determine the effects of mediation.

Author contributions

AM: conceptualization, methodology, software, investigation, resources, data curation, writing - original draft; DA : conceptualization, formal analysis, writing - review & editing, supervision, project administration, funding acquisition; AQ : conceptualization, validation, supervision, writing - review & editing, visualization, competing interests.

Competing interests

The authors declare no competing interests.

Data availability

The data that support the findings of this study are available from the corresponding author, upon reasonable request.

Ethical approval

This research does not use human and/or animal studies.

Informed consent

This article does not contain any studies with human participants performed by any of the authors.

Acknowledgements

We would like to thank Beasiswa Pendidikan Indonesia (BPI) BPPT Puslapdik of the Ministry of Education, Culture, Research, and Technology Indonesia, LPDP for granting and supporting this research.

Abdi, Y., Li, X., & Càmara-Turull, X. (2020). Impact of sustainability on firm value and financial performance in the air transport industry. Sustainability (Switzerland), 12(23), 1–22. https://doi.org/10.3390/su12239957
Abdi, Y., Li, X., & Càmara-Turull, X. (2022). Exploring the impact of sustainability (ESG) disclosure on firm value and financial performance (FP) in airline industry: the moderating role of size and age. Environment, Development and Sustainability, 24(4), 5052–5079. https://doi.org/10.1007/s10668-021-01649-w
Alsayegh, M. F., Abdul Rahman, R., & Homayoun, S. (2023). Corporate Sustainability Performance and Firm Value through Investment Efficiency. Sustainability (Switzerland), 15(1), 1–13. https://doi.org/10.3390/su15010305
Ambec, S., & Lanoie, P. (2008). Does it pay to be green? A systematic overview. Academy of Management Perspectives, 22(4), 45–62. https://doi.org/10.5465/amp.2008.35590353
Artiach, T., Lee, D., Nelson, D., & Walker, J. (2010). The determinants of corporate sustainability performance. Accounting and Finance, 50(1), 31–51. https://doi.org/10.1111/j.1467-629X.2009.00315.x
Bing, T., & Li, M. (2019). Does CSR signal the firm value? Evidence from China. Sustainability (Switzerland), 11(15), 1–23. https://doi.org/10.3390/su11154255
Boiral, O., & Henri, J. F. (2017). Is Sustainability Performance Comparable? A Study of GRI Reports of Mining Organizations. Business and Society, 56(2), 283–317. https://doi.org/10.1177/0007650315576134
Bose, S., Shams, S., Ali, M. J., & Mihret, D. (2022). COVID-19 impact, sustainability performance and firm value: international evidence. Accounting and Finance, 62(1), 597–643. https://doi.org/10.1111/acfi.12801
Chang, X., Fu, K., Jin, Y., & Liem, P. F. (2022). Sustainable Finance: ESG/CSR, Firm Value, and Investment Returns*. In Asia-Pacific Journal of Financial Studies (Vol. 51, Issue 3). https://doi.org/10.1111/ajfs.12379
Chen, Y., & Ma, Y. (2021). Does green investment improve energy firm performance? Energy Policy, 153(121), 112252. https://doi.org/10.1016/j.enpol.2021.112252
Choi, J. S., Kwak, Y. M., & Choe, C. (2010). Corporate social responsibility and corporate financial performance: Evidence from Korea. Australian Journal of Management, 35(3), 291–311. https://doi.org/10.1177/0312896210384681
Deegan, C. M. (2019). Legitimacy theory. Accounting, Auditing & Accountability Journal, 32(8), 2307–2329. https://doi.org/10.1108/AAAJ-08-2018-3638
Dunk, A. S. (1999). An examination of the role of financial investment appraisal methods in the context of international environmental regulation. Accounting, Auditing & Accountability Journal, 12(2), 188–205. https://doi.org/10.1108/09513579910270101
Eyraud, L., Clements, B., & Wane, A. (2013). Green investment: Trends and determinants. Energy Policy, 60, 852–865. https://doi.org/https://doi.org/10.1016/j.enpol.2013.04.039
Firoiu, D., Ionescu, G. H., Pîrvu, R., Cismaș, L. M., Tudor, S., & Patrichi, I. C. (2021). Dynamics of implementation of sdg 7 targets in eu member states 5 years after the adoption of the paris agreement. Sustainability (Switzerland), 13(15). https://doi.org/10.3390/su13158284
GRI. (2016). GRI 101: Fundamental 2016. Gssb, 1(1), 30. https://www.globalreporting.org/standards/media/1439/spanish-gri-101-foundation-2016.pdf
Hayes, A. F. (2022). Introduction to Mediation, Moderation, and Conditional Process Analysis : A Regression-Based Approach (Third Edit). The Guilford Press.
Heinkel, R., Kraus, A., & Zechner, J. (2001). The Effect of Green Investment on Corporate Behavior Published by : Cambridge University Press on behalf of the University of Washington School of Business Administration Stable URL : http://www.jstor.org/stable/2676219 The Effect of Green Investment on C. The Journal of Financial and Quantitative Analysis, 36(4), 431–449. https://www.jstor.org/stable/
Horan, D. (2019). A new approach to partnerships for SDG transformations. Sustainability (Switzerland), 11(18). https://doi.org/10.3390/su11184947
Hussain, N., Rigoni, U., & Cavezzali, E. (2018). Does it pay to be sustainable? Looking inside the black box of the relationship between sustainability performance and financial performance. Corporate Social Responsibility and Environmental Management, 25(6), 1198–1211. https://doi.org/10.1002/csr.1631
Indriastuti, M., & Chariri, A. (2021). The role of green investment and corporate social responsibility investment on sustainable performance. Cogent Business and Management, 8(1). https://doi.org/10.1080/23311975.2021.1960120
Kemp-Benedict, E. (2018). Investing in a Green Transition. Ecological Economics, 153(August), 218–236. https://doi.org/10.1016/j.ecolecon.2018.07.012
Kim, W. S., Park, K., Lee, S. H., & Kim, H. (2018). R & D investments and firm value: Evidence from China. Sustainability (Switzerland), 10(11), 1–18. https://doi.org/10.3390/su10114133
Li, Z. Z., Li, R. Y. M., Malik, M. Y., Murshed, M., Khan, Z., & Umar, M. (2021). Determinants of Carbon Emission in China: How Good is Green Investment? Sustainable Production and Consumption, 27, 392–401. https://doi.org/10.1016/j.spc.2020.11.008
Liu, L., Zhao, Z., Zhang, M., & Zhou, D. (2022). Green investment efficiency in the Chinese energy sector: Overinvestment or underinvestment? Energy Policy, 160(June 2021), 112694. https://doi.org/10.1016/j.enpol.2021.112694
Lourenço, I. C., Branco, M. C., Curto, J. D., & Eugénio, T. (2012). How Does the Market Value Corporate Sustainability Performance? Journal of Business Ethics, 108(4), 417–428. https://doi.org/10.1007/s10551-011-1102-8
Lu, W. L., & Taylor, M. E. (2016). Which factors moderate the relationship between sustainability performance and financial performance? A meta-analysis study. Journal of International Accounting Research, 15(1), 1–15. https://doi.org/10.2308/jiar-51103
Marhfor, A., Bouslah, K., & Hmaittane, A. (2022). Does Firm Political Risk Affect the Relationship between Corporate Social Responsibility and Firm Value? Sustainability (Switzerland), 14(18), 1–23. https://doi.org/10.3390/su141811217
Meutia, I., Kartasari, S. F., & Yaacob, Z. (2022). Stakeholder or Legitimacy Theory? The Rationale behind a Company’s Materiality Analysis: Evidence from Indonesia. Sustainability (Switzerland), 14(13). https://doi.org/10.3390/su14137763
Sachs, J. D., Woo, W. T., Yoshino, N., & Taghizadeh-Hesary, F. (2019). Importance of Green Finance for Achieving Sustainable Development Goals and Energy Security. Handbook of Green Finance, 1–10. https://doi.org/10.1007/978-981-10-8710-3_13-1
Shanken, J., & Smith, C. W. (1996). Implications of Capital Markets Research for Corporate Finance. Financial Management, 25(1), 98. https://doi.org/10.2307/3665905
Sharif, A., Kocak, S., Khan, H. H. A., Uzuner, G., & Tiwari, S. (2023). Demystifying the links between green technology innovation, economic growth, and environmental tax in ASEAN-6 countries: The dynamic role of green energy and green investment. Gondwana Research, 115, 98–106. https://doi.org/10.1016/j.gr.2022.11.010
Singh, P. J., Sethuraman, K., & Lam, J. Y. (2017). Impact of corporate social responsibility dimensions on firm value: some evidence from Hong Kong and China. Sustainability (Switzerland), 9(9). https://doi.org/10.3390/su9091532
Thuy, C. T. M., Khuong, N. V., Canh, N. T., & Liem, N. T. (2021). Corporate social responsibility disclosure and financial performance: the mediating role of financial statement comparability. Sustainability (Switzerland), 13(18). https://doi.org/10.3390/su131810077
Vandermerwe, S., & Oliff, M. D. (1990). Customers drive corporations. Long Range Planning, 23(6), 10–16. https://doi.org/10.1016/0024-6301(90)90096-M
Wang, K., Zhang, H. M., Tsai, S. B., Wu, L. D., Xue, K. K., Fan, H. J., Zhou, J., & Chen, Q. (2018). Does a board chairman’s political connection affect green investment?-From a sustainable perspective. Sustainability (Switzerland), 10(3), 1–14. https://doi.org/10.3390/su10030582
Warren, L., & Jack, L. (2018). The capital budgeting process and the energy trilemma - A strategic conduct analysis. British Accounting Review, 50(5), 481–496. https://doi.org/10.1016/j.bar.2018.04.005
Xu, E. G., Graves, C., Shan, Y. G., & Yang, J. W. (2022). The mediating role of corporate social responsibility in corporate governance and firm performance. Journal of Cleaner Production, 375(December 2021), 134165. https://doi.org/10.1016/j.jclepro.2022.134165
Yadav, P. L., Han, S. H., & Rho, J. J. (2016). Impact of Environmental Performance on Firm Value for Sustainable Investment: Evidence from Large US Firms. Business Strategy and the Environment, 25(6), 402–420. https://doi.org/10.1002/bse.1883
Yannan, D., Ahmed, A. A. A., Kuo, T. H., Malik, H. A., Nassani, A. A., Haffar, M., Suksatan, W., & Iramofu, D. P. F. (2022). Impact of CSR, innovation, and green investment on sales growth: new evidence from manufacturing industries of China and Saudi Arabia. Economic Research-Ekonomska Istrazivanja , 35(1), 4537–4556. https://doi.org/10.1080/1331677X.2021.2015610
Yoon, B., Lee, J. H., & Byun, R. (2018). Does ESG performance enhance firm value? Evidence from Korea. Sustainability (Switzerland), 10(10). https://doi.org/10.3390/su10103635
Zhang, Y., & Berhe, H. M. (2022). The Impact of Green Investment and Green Marketing on Business Performance: The Mediation Role of Corporate Social Responsibility in Ethiopia’s Chinese Textile Companies. Sustainability (Switzerland), 14(7). https://doi.org/10.3390/su14073883
Zheng, S., & Jin, S. (2023). Is corporate green investment a determinant of corporate carbon emission intensity? A managerial perspective. Heliyon, 9(12), e22401. https://doi.org/10.1016/j.heliyon.2023.e22401

No competing interests reported.

The Impacts of Green Investment and Firm Value: Exploring from the Mediation Role of Sustainability Performance

Status:

Version 1

Abstract

Figures

Introduction

Literature review and hypotheses development