Corporate ESG Profile on Performance: Evidence from Indonesian Insurance Industry

Abstract

Sustainable growth is necessary, and even a key, to every business, including financial institutions such as an insurance company. Many financial institutions conducting irresponsible practices, such as exploiting market inefficiency, have been faced with severe consequences. Evidence from some studies conclude that insurance firms need to adopt a socially responsible approach to conducting business as it may lead to better financial performance. Designing and proposing sustainable insurance programs to insurance companies that run their businesses in Indonesia have been one of the insurers’ approaches to creating more stable and certain industry climate since ESG issues have become prominent discussion among developed and developing countries. In our study, we attempt to construct the ESG profile by integrating three components: (1) the firm’s level of understanding of ESG principles, (2) the way or manner by which the firm is integrating the ESG, and (3) the firm’s paradigm on ESG integration. This study explores and examines the current state of sustainable insurance development in Indonesia, portrayed by insurance firms’ knowledge, readiness, and potential in developing sustainable insurance. By performing two techniques of multivariate analysis: SEM analysis and econometric analysis, the SME results conclude that the insurer’s knowledge and current development in sustainable insurance products have a positive effect on the insurance firm’s willingness to develop sustainable insurance products in the future, while our regression analysis provides evidence that an insurance company’s level of understanding of sustainable finance principles is positively and significantly related to firm performance. Accordingly, the main recommendation of this study is broadening the horizon of ESG risk knowledge of the potential clients of sustainable insurance products could help insurance companies market their sustainable products more effectively and efficiently.