Does Innovation Capacity Improve ESG Performance in Digital Industries?

¹ Bina Nusantara University, School of Accounting, Finance International. Jl. K.H. Syahdan No. 9. Jakarta Barat 11480. Indonesia
² Universitas Indonesia, Faculty of Economics and Business, Beji, Depok, Jawa Barat 16424. Indonesia

^* Corresponding author: vtohang@binus.edu

Abstract

The ongoing debate related to belief and challenges on the impact of ESG performance to improve a firm’s performance and shareholder value has been an interest of many empirical studies. Previous research discovered myriad inconclusive results explained by a variety of different proxies of CSP measures, methodology, samples, and underlying theories. In the communication industry, the synergies between business strategy and sustainable development are critical in various contexts. This study will fill in the gap related to ESG performance studies in conjunction with financial performance, particularly in an ambidextrousness’ of extremely fast-paced change of digital transformation and aggressive global competitiveness industry of communication services in Asia, since this competitive industry will need to continuously build on novel processes, innovations, and methods to achieve targeted economic growth. Although many studies have explored ESG dimensions, there has been little attention incorporated into firms’ strategy orientation of specific industries such as digital-related industries, and yet previous studies have mostly ignored the moderating effect of ESG-related strategy and innovation of the firms. The results show that the association between ESG and financial performance is strongly affected by the existence of innovation capacity reflected by choices of strategy. The result shows that the moderating variable in this study weakens firms’ ROA (operational performance) although insignificant for market-related financial performance as explained by the RBV and ambidexterity theories. This result practically contributes to the communication industry in identifying the balance and importance of decision-making related to organizational ambidexterity and readiness to change.