Signaling sustainability: the impact of ESG risk and sustainability awards on the performance of ESG-leader firms

The growing integration of Environmental, Social, and Governance (ESG) in business and sustainability ratings has attracted increasing scrutiny in developing capital markets. This study examines the effects of ESG risk exposure and sustainability awards on firm performance using both accounting- and market-based measures. Unlike prior studies that rely on ESG scores, this study focuses on ESG risk as a forward-looking measure capturing firms’ exposure to financially material ESG-related uncertainties. Using an unbalanced panel of 143 firm-year observations from the IDX ESG Leaders Index (2020–2024), a Random Effects model serves as the baseline, with System GMM applied for robustness analysis. Results indicate that ESG risk negatively but insignificantly affects accounting performance and positively but insignificantly affects market performance. In contrast, sustainability awards positively and significantly affect accounting performance but not market performance. These findings suggest that ESG risk has limited influence on investor decisions, whereas sustainability awards enhance operational performance by signaling credible non-financial commitments. This study contributes by emphasizing ESG from a risk-based rather than performance-oriented perspective, offering insights into sustainability-related exposures and transparency in emerging markets.