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Environm
The effect of enterprise risk ental, social
management on financial and
governance
performance and firm value: the
role of environmental, social and 647

governance performance Received 1 September 2019

Revised 2 May 2020
18 November 2020
Chairani Chairani and Sylvia Veronica Siregar 3 March 2021
Accepted 3 March 2021
Department of Accounting, Faculty of Economics and Business,
Universitas Indonesia, Depok, Indonesia

Abstract
Purpose – This study aims to examine the effect of enterprise risk management (ERM) on financial
performance and firm value, as well as the moderating role of environmental, social and governance (ESG)
performance.
Design/methodology/approach – The samples in this study are listed companies in the ASEAN 5
(Indonesia, Malaysia, Philippines, Singapore and Thailand) during the years 2014–2018, with total
observations of 680 firm-years. Fixed effect panel data regressions were used to test the hypotheses. The data
was collected from Financial Report, Annual Reports and Thomson Reuters.
Findings – The results show that ERM has a positive significant effect on financial performance and firm
value. This paper also finds that ESG has a significant moderating role in increasing the effect of ERM on
firm value. Further, this paper divides the samples into sensitive and non-sensitive industries and find a
significant moderating role of ESG performance on firm performance for sensitive industries.
Originality/value – Extant studies have not empirically examined the moderating role of ESG on the
effect of ERM on firm performance and firm value. The findings have important implications in suggesting
that firms need to analyze various threats and opportunities related to and ESG risks in achieving competitive
advantage.
Keywords Enterprise risk management (ERM), Environmental, social and governance (ESG),
Financial performance, Firm value, ASEAN 5
Paper type Research paper

Introduction
In a rapidly changing global world, companies are required to assess various threats and
opportunities to maintain their competitive advantage – a practice referred to as risk
management. Risk management is crucial because each company must be responsible for
providing value to stakeholders and planning the company strategies through management
decisions at all levels. In applying the concept of risk management, companies generally face
a problem where the concept of risk is not well-interpreted or accepted by the members

Meditari Accountancy Research

The first author would like to express gratitude to the Ministry of Education and Culture of the
Vol. 29 No. 3, 2021
pp. 647-670
Republic of Indonesia for awarding the “Flagship Scholarships.” Both authors also would like to © Emerald Publishing Limited
2049-372X
thank Universitas Indonesia for providing PITMA research grant. DOI 10.1108/MEDAR-09-2019-0549
MEDAR throughout the organization. They tend to only focus on individual risk or risk of unit
29,3 division (Moeller, 2011).
In response to these problems, regulators, auditors, risk assessment institutions and
various stakeholders encourage more structured and integrated risk management as a way
to improve control of the risk management system. The result is multidirectional
encouragement for the implementation of the company’s risk management system or
648 enterprise risk management (ERM) (Lundqvist, 2015). According to the Committee of
Sponsoring Organizations of the Treadway Commission (COSO, 2004, p. 2), ERM is:
a process, affected by an entity’s board of directors, management and other personnel, applied in
strategy setting and across the enterprise, designed to identify potential events that may affect the
entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding
the achievement of entity objectives.
Although the implementation of ERM does not specifically change the level of company
risk, the existence of ERM has an impact on the measurement and monitoring of risk
throughout the company (Callahan and Soileau, 2017).
The primary objective of ERM is to maximize shareholders’ value (COSO, 2004; Sobel
and Reding, 2004; Beasley et al., 2008; Hoyt and Liebenberg, 2011). ERM implementation
assists the company to understand inherent risks in all aspects of business activities; thus, it
provides an objective basis for allocating company resources and improving the decision-
making process. Extant studies have examined the effect of ERM on firm performance and
firm value. Many have found evidences that support the notion of the positive effect of ERM
on firm performance and firm value (Hoyt and Liebenberg, 2011; McShane et al., 2011; Florio
and Leoni, 2017; Farrell and Gallagher, 2019).
The effect of ERM implementation on company performance and firm value may be
further affected by other factors, which may include internal and external factors. Gordon
et al. (2009) use the contingency perspective and suggest that the relationship between ERM
and firm performance is influenced by other factors. Following Shad et al. (2019), we focus
on sustainability performance (measured by environmental, social and governance – ESG
performance) as a moderating variable. ESG covers both internal and external aspects,
which cover andESG performance. The combination of these ESG factors with ERM can
increase the effect of ERM on company performance and firm value.
In the past few years, the risks companies have faced have mostly originated from
ESG issues. These problems occur due to the use of natural resources that are not in line
with production activities that have an impact on environmental pollution, bribery and
corruption, business ethics, etc. (Aziz et al., 2016a, 2016b; COSO and WBCSD, 2018).
This statement is also supported in The World Economic Forum’s (2018) Global Risks
Report, which suggests that risks related to environmental or social issues, such as
extreme weather, water crises, natural disasters and the failure of mitigation and
adaptation to climate change, dominate the top risks for companies. With the increase
in environmental and social issues, the role of governance, such as increasing internal
control effectiveness and the oversight of culture to manage risk, is an important factor
to be considered.
ESG addresses areas that characterize sustainable, responsible or ethical investment. It is
used by investors to evaluate corporations and determine the future financial performance
of companies. ESG is used in risk assessment strategies, which is factors in investment
decisions and risk management processes (Dunn et al., 2017; Parfitt, 2019). Kell (2018)
pinpoint the importance of ESG information for assessing corporate risks, strategies and
operational performance.
 Dunn et al. (2017) suggest that ESG scores help forecast future statistical risks up to five Environm
years later, where the deterioration of ESG scores is associated with about a 1% increase in ental, social
risk. Poor ESG performance provide a signal of the increase of risk in the future. Investors
might be able to use ESG performance to glean additional insights about the riskiness of
and
their investments. governance
ASEAN-Japan Centre (2019) states that investment by considering ESG has received
worldwide attention and its greatest influence is directed towards Asia, especially in
ASEAN 5 member countries. However, despite the increase in ESG awareness, the evidence 649
shows that the risk management practices are not adequately addressing problems related
to ESG (WBCSD, 2017). There are three underlying reasons; first, the concept of ERM to
measure risks related to ESG cannot be quantified monetarily, so it is difficult for companies
to prioritize and allocate resources. Second, ERM should become a culture that must be
understood by all levels of the company from top to bottom, but the ESG risks are usually
limited only the sole responsibility of the risk management division and/or the sustainability
division. Third, sometimes ESG risks are considered to be the sole responsibility of the
sustainability division, whereas, for the risk management division, those risks are
considered to be insignificant compared to strategic, operational or financial risks that can
be analyzed quantitatively. Hence, there is not enough attention in handling these ESG-
related risks. In addition, Aziz et al. (2016a, 2016b) suggest that although the ESG is very
important, the risk is unpredictable. Thus, no matter how good an ERM is, losses will occur
due to these risks always present and that could have a hugely adverse impact on company
performance. Nevertheless, companies need to have good ESG performance.
ESG performance will increase stakeholder confidence that the company has carried out
its activities in accordance with their expectations. Exploiting ESG performance will have
an impact on increasing the economic expectations of investors and other stakeholders
(COSO and WBCSD, 2018). The magnitude of the influence of ERM on financial
performance and firm value is expected to increase with the extent of ESG performance.
ERM and ESG vary in various industries due to costs and benefits associated with
industrial characteristics. For instance, in the sensitive-industry category that consists of
companies whose activities have a direct impact on ESG issues, such as oil and gas
companies or companies in the fields of chemical, mining and metal manufacturing (Cai
et al., 2012; Lin et al., 2015; Garcia et al., 2017), their stakeholders demand environmentally
friendly products and services and therefore companies are required to adopt non-toxic CO2
and low emissions production processes. Stakeholders also expect the company to make
more financial contributions as a form of legitimacy and, besides, shareholders need the
company to improve corporate governance to secure its investment (Lin et al., 2015). On top
of that, the pressure for disclosure of ERM is higher in sensitive industries (Subramaniam
et al., 2015) due to the consequences of business risks in the form of carbon, which seizes the
attention of stakeholders. The carbon risk will increase costs and affect the company’s
reputation. Thus, the magnitude of the influence of ERM on financial performance and firm
value, which is moderated by ESG aspects, will be higher in industries that carry out
sensitive activities compared to non-sensitive industries (Cai et al., 2012; Lin et al., 2015;
Garcia et al., 2017).
Our samples are listed companies in five selected ASEAN countries, which are Indonesia,
Singapore, Thailand, Malaysia and the Philippines. These countries are usually called the
ASEAN-5. We selected these countries because they are the five largest countries in
ASEAN. In addition, these countries possess similarities in terms of their geographical
location and social contexts. ASEAN countries have undergone strong economic growth in
recent years but still lag behind developed countries. However, this economic growth has
MEDAR had a negative effect on increasing environmental problems, such as emission, water
29,3 pollution, etc. ASEAN will also play an important role in future world energy demand in the
coming years due to its fast-growing economy, as well as its large population. These
characteristics have increased the sustainability issues among ASEAN countries
(Vithayasrichareon et al., 2012; Quah and Siong, 2015).
Our study makes several contributions. First, we have not found any empirical studies
650 examining the moderating role of ESG on the effect of ERM on firm performance and firm
value. Shad et al. (2019) have developed a conceptual framework that examines the
moderating effect of sustainability on the relationship between ERM implementation and
business performance, but they have not provided empirical evidence. We fill this gap.
Second, the conceptual model developed by Shad et al. (2019) considered the moderating role
of sustainability from the disclosure side only, whereas in our empirical study we measured
ESG performance (using ESG scores from Thomson Reuters database), instead of just
disclosure. We argue that it is the ESG performance, not disclosure per se, that should have a
moderating role. Third, Khan and Ali (2017) developed a conceptual model of ERM and firm
performance with intellectual capital as the moderating variable. We argue that intellectual
capital only reflects internal factors, whereas ESG captures both internal and external
factors and thus it should have a higher effect to increase the association between ERM and
firm performance, as well as firm value.

Literature review and hypotheses development

Theoretical background
Jensen and Meckling (1976) explained that agency relationships are contracts where one or
more people (principals) involve another person (agents) to perform services on their behalf.
Principals and agents have self-interest and thus the relationship can create conflicts of
interest. Conflicts arising from agency problems can be minimized by management (agents)
reporting company activities to owners (principals) as a form of transparency. The ERM
implementation and the concern for ESG is a form of management responsibility (Agustina
and Baroroh, 2016) that can reduce agency costs, which, in turn, will have a positive effect
on firm performance and firm value.
Stakeholder theory states that in organizations, there are broader groups (stakeholders)
such as shareholders, managers, employees, creditors, suppliers, customers, government
agents and the society who have an interest in the activities, goals and behavior of the
company’s business (Freeman, 1984). The company must make decisions that are in line
with the interests of those groups because its activities will influence them. Their
satisfaction will increase along with the good intentions of the company, thus impacting the
company’s performance and value in the future. It also provides a signal about the positive
attitude of the company that has completed part of the contract and that has its activities in
accordance with the value system of the community and the surrounding environment
(Shad et al., 2019). In other words, the company should consider not just internal factors
external factors outside the organization. Social and environmental aspects can be seen as
external factors that push companies to operate in an efficient and effective manner to
preserve their image and thus be able to maintain and improve their performance (Freeman,
1983). Governance can be considered as an internal factor that improves companies’
business processes and facilitates an increase in their performance. The combination of both
internal and external factors with ERM can provide a stronger effect than the sum of their
separate effects (Shad et al., 2019).
From the resource-based view theory, companies differ in their performance due to
differences in their resources (Barney, 1991). Hart (1995) further argues that constraints
push companies to create innovative resources and capabilities, which will allow companies Environm
to respond more efficiently and effectively to outside pressures, which then turn into higher ental, social
performance. Following Hart’s (1995) argument, we propose ERM as a strategy that allows
firms to optimize their competitive advantage as they are better at managing their risk. ESG
and
is a combination of internal and external factors that moderate the effect of ERM on governance
performance and value where companies that have better ESG performance will be more
inclined to translate their ERM into higher performance (Fraj et al., 2011).
Another theory is legitimacy theory. Legitimacy is the perception that an entity engages 651
in action that is desirable, appropriate or that reflects socially developed norms, values,
beliefs and resolution systems (Suchman, 1995). Deegan (2002) state that legitimacy is
obtained when the company does not interfere with or is congruent with the existence of a
society’s value system and environment. The rationale for legitimacy theory is that the
company will continue to exist if the society realizes that the organization operates
according to the community’s value system. Legitimacy theory encourages companies to
ensure that their activities and performance can be accepted by society. Companies use their
annual reports to describe ESG responsibilities and managing risks, so they are accepted by
the society. With acceptance from the society, it is expected to increase the value of a
company so that it can increase company profits. This can be encouraging or assist
investors in making investment decisions.

Hypotheses development
The effect of enterprise risk management on financial performance and firm value. As
suggested by agency theory and resource-based theory above, ERM is a form of
management responsibility based on the principles of accountability and transparency in
corporate governance (Agustina and Baroroh, 2016) and it creates innovative resources that
increase companies’ competitive advantage, which translates into higher performance.
Consistent with several previous studies, we expect that there is a positive effect of ERM
on firm performance and value. Farrell and Gallagher (2019) argue that ERM is beneficial in
various aspects, including better risk-return decisions, more efficient capital allocation,
reduced earnings volatility, increasing stock prices, creating synergies for risk management
activities that differ between divisions, saving costs by avoiding duplication of risk-related
expenses and improving senior management and oversight of risk-related board. A better
ERM will have an impact to make shareholders more confident about the capital invested
(Agustina and Baroroh, 2016). Nocco and Stulz (2006) argue that ERM creates value for
shareholders by increasing the visibility of risk and return of choices from various projects
and assist in making strategic plans and revealing exposure to all company risks and
ultimately increasing the company’s competitive advantage.
Florio and Leoni (2017) state that companies with sophisticated ERM systems have lower
enterprise risks and better performance. This shows that the ERM system contributes to
increasing the accuracy of operational and strategic decisions, as well as to the reduction of
direct and indirect costs associated with risk. Callahan and Soileau (2017) argue that ERM
reduces the possibility of taking much risk in the activities of the company and has an
impact on increasing returns capital; thus, companies that adopt ERM will experience higher
operational performance. Agustina and Baroroh (2016) state that ERM provides a guarantee
to stakeholders that the company must maximize corporate profits while optimizing existing
risks. Eckles et al. (2014) also state that companies that adopt ERM will increase company
profits while simultaneously reducing risk. ERM provided companies with reliable risk
management and adequate risk policies that play a role in improving financial performance:
MEDAR H1a. ERM has a positive effect on financial performance.
29,3 H1b. ERM has a positive effect on firm value.
The moderating role of environmental, social and governance on the effect of enterprise risk
management on financial performance and firm value. Based on stakeholder theory and
legitimacy theory, social responsibility can reduce asymmetric information because it
652 signals better management quality (Godfrey et al., 2009). Stakeholders perceive social
responsibility as having a positive impact on a company’s future performance and they also
conclude that higher social responsibility reduces corporate sensitivity to negative shocks
that might adversely affect the company (Bouslah et al., 2013). This form of social
responsibility investment can produce moral values or good intentions that play a role as
insurance protection (risk management) which reduces the impact on the company’s cash
flow during a crisis or negative event about the company (Godfrey et al., 2009). From the
resource-based view (Barney, 1991) explained in the previous section, ESG moderates the
effect of ERM on performance and value where companies that have better ESG
performance will be more inclined to translate their ERM into higher performance (Fraj
et al., 2011).
Companies are consistently faced with decisions about how to allocate scarce resources
and place higher risk pressures on companies to achieve optimal levels of performance and
corporate value. The risk comes more directly from sources related to andESG issues. From
the environmental side, many negative impacts caused by the company’s production
activities can damage the environment, such as waste pollution, climate change and even
wildfire. From the social side, problems regarding business ethics, unemployment, income
inequality, employee welfare and work safety are also high risk. In terms of governance,
there are comprehensive issues related to the role of leadership and the composition of
company management, bribery and corruption, business ethics and the issue of executive
compensation (ASEAN Japan-Centre, 2019; Aziz et al., 2016a, 2016b; COSO and WBCSD,
2018).
However, the ERM that is expected to assist companies in addressing ESG risk strategies
often has not handled these risks optimally. Aziz et al. (2016a, 2016b) suggest that social and
environmental risks are unpredictable and thus that no matter how well the company
creates a strategy, losses caused by the impact of these risks will still arise and adversely
affect the company. In line with this explanation, WBCSD (2017) elaborates on three points:
first, the ERM concept related to ESG risk cannot be assessed monetarily, so it is difficult for
companies to prioritize and allocate resources. Second, the concept of ERM is a culture that
must be understood by all levels of the company, yet ESG risks are only known by the risk
management and sustainability division and thus the implementation of policies to address
these risks is not optimal and comprehensive. Third, often ESG risk is considered to be the
sole responsibility of the sustainability division, whereas, for the risk management division,
the risk is considered to be less significant compared to strategic, operational or financial
risks; this creates a bias towards managing risks associated with ESG.
However, even though ERM has not been able to properly capture risks related to ESG
aspects, companies still need to analyze these risks. It is in line with the stakeholder
(Freeman, 1984) that the company’s strategic decision-making is the result of stakeholder
expectations. Managers must make corporate decisions with respect to the welfare of
stakeholders. The welfare of stakeholders is assessed by how much the company carries out
responsibilities related to the ESG. Godfrey et al. (2009) state that this form of responsibility
is considered a positive signal that the company is not only profit-oriented but they also
consider the impact of the company’s operational activities on the welfare of stakeholders.
Thus, we expect that ESG plays a moderating role in increasing the positive effect of ERM Environm
on firms’ financial performance and firm value: ental, social
H2a. ESG increases the positive effect of ERM on financial performance. and
governance
H2b. ESG increases the positive effect of ERM on firm value.
Effect of enterprise risk management on financial performance and firm value is moderated
by environmental, social and governance in sensitive and non-sensitive industries. Based on 653
legitimacy theory, sensitive industries tend to disclose ESG information more so than non-
sensitive industries; this is because they have more motivation to gain legitimacy from the
society (Kuzey and Uyar, 2017). We identified sensitive categories, as companies whose
scope of business has a direct impact on andESG issues, such as oil and gas companies,
companies in the fields of chemistry or mining and manufacturing companies such as those
involved with steel (metal) manufacturing (Garcia et al., 2017). Sassen et al. (2016) state that
the impact of the ESG factor on company risk is different, depending on the type of industry.
In governance risks, sensitive industries such as oil and gas companies or energy
companies are more likely to commit bribery, corruption and even misappropriation of tax
payments (Transparency International, 2019). This statement is also supported by a survey
conducted by Transparency International (2011) about the Bribe Payers Index, where the
risk of bribery and corruption dominates the oil and gas and mining industries compared to
other sectors. This industry intentionally protects the identities of shareholders and
subsidiaries to enable corporate leaders to be corrupt. Kuzey and Uyar (2017) also support
this statement; they argue that the manufacturing industry is a riskier industry than that of
service. Manufacturing companies are more likely to disclose social performance because
their activities in producing goods tend to have a high impact on the environment and cause
higher rates of health problems. Thus, in terms of environmental risks, sensitive industries
tend to produce waste and pollution from production activities that damage the environment
(Cai et al., 2012; Lin et al., 2015).
Different industrial sectors and the level of risk that they are associated with has also
caused differences in how ERM is disclosed (Subramaniam et al., 2015). Subramaniam et al.
(2015) research is focused on the energy industry, which presents business risks in the form
of carbon; this seizes the attention of stakeholders. This carbon risk will increase costs and
affect the company’s reputation if not managed properly, so the pressure for ERM disclosure
is higher in that industry. In line with this statement, several studies have argued that
industries with complex business fields, such as energy companies, run more ERM
programs (Lechner and Gatzert, 2018; Farrell and Gallagher, 2019). Companies with complex
business fields tend to be less transparent, making it difficult for stakeholders to assess the
risks faced. Therefore, with ERM, this problem can be overcome by reducing asymmetric
information.
ESG is more relevant for sensitive industries that, as those companies tend to have a
higher sensitivity to environmental issues. Companies in sensitive categories also tend to
have higher ESG performance, as they need to protect the company’s reputation because
companies in this category are more likely to cause negative impacts that have an impact on
stakeholders (Garcia et al., 2017). The level of ERM also differs in various industries and has
an impact on the creation of shareholder value through risk-based decision-making and
good capital allocation to improve performance (Tillinghast-Towers Perrin, 2004).
Therefore, we expect that ESG performance of firms in sensitive industries have a stronger
moderating role on the effect of ERM on financial performance and firm value:
MEDAR H3a. ESG in sensitive industries has a higher positive effect of ERM on financial
29,3 performance than in non-sensitive industries.
H3b. ESG in sensitive industries has a higher positive effect of ERM on firm value than
in non-sensitive industries.

654 Research method

Sample selection
Our study used samples of all listed firms in ASEAN 5 (Indonesia, Malaysia, Singapore,
Philippines and Thailand) over a period of five years (2014–2018). ASEAN 5 was chosen
because it has the highest economic growth value compared to other ASEAN countries.
High economic growth is influenced by investment activities in ESG fields (ASEAN-Japan
Centre, 2019). We use secondary data from annual reports, the websites of related
companies, Thomson Reuters and the World Bank. Table 1 below outlines our sample
selection process. We had 136 samples for each year and thus in total, we had 860
observations (136
5 years).

Variables definition
The dependent variables are financial performance (Return on Asset, ROA) and firm value
(Tobin’s Q). The main independent variable is ERM (AdvERM). COSO (2004) defines ERM
as a process that is influenced by directors, management and other employees, which
is applied in company strategies designed to identify the potential of a phenomenon that
might affect the company in managing the risk to provide confidence at a reasonable level.
Nocco and Stulz (2006) argue that ERM can create long-term competitive advantages for
companies by creating value at the macro level, by helping companies maintain access to
capital markets and other resources and at the micro-level, by creating a “way of life” for
managers and employees at all levels of the company. AdvERM is measured based on seven
aspects consisting of three groups: the first group consists of two aspects related to
governance consisting of the existence of a chief risk officer (CRO) and risk committee
(RiskCom); the second group consists of three aspects to assess the risk assessment, which
consists of risk assessment frequency (RAfreq), risk assessment level (RAlevel) and risk
assessment method (RAmethod) (Florio and Leoni, 2017) and the third group consists of two
aspects to assess the use of the ERM framework using the COSO ERM framework (Pérez-
Cornejo et al., 2019) and ISO 31000. Table 2 provides a detailed explanation of the definitions
of the variables. Each of these seven aspects is analyzed and given a value of 1 if it meets the
criteria and 0 if otherwise. We summed all values of the seven components and then we
assigned an AdvERM score of 1 if the value was at least 4 out of 7 and 0 if otherwise.
We use the above ERM measurement as ERM is a multi-dimensional and complex
measurement concept (Florio and Leoni, 2017; Pérez-Cornejo et al., 2019) and to date, no

Criteria Indonesia Malaysia Singapore Thailand Philippines Total

Total listed firms in ASEAN 5 the year 2018 346 462 279 443 140 1,670
Unavailable ESG data (318) (426) (245) (421) (118) (1,528)
Outliers[a] (2) (2) (1) (1) – (6)
Final sample in each year 26 34 33 21 22 136
Table 1.
Sample selection Note: Outliers are any values that are greater than 2 standard deviations from me
No Variable Measurements
Environm
ental, social
1 ROA Net income/total assets and
2 Tobin’s Q (Market value of equity þ total liabilities)/total assets
3 CRO 1 if the company has a risk management director or chief risk officer and 0 if governance
otherwise (Florio and Leoni, 2017)
4 RiskCom 1 if the company has established a risk committee and 0 otherwise (Florio and Leoni,
2017) 655
5 RAFreq 1 if the company carries out risk assessment and or risk reporting procedures at
least twice a year and 0 if otherwise (Florio and Leoni, 2017)
6 RAlevel 1 if the company carries out risk assessment procedures on an ongoing basis to the
lowest level of the company (for example based on business units or functions) and 0
if otherwise (Florio and Leoni, 2017)
7 RAMethod 1 if the company adopts specific qualitative and quantitative risk assessment
methods and 0 if otherwise (Florio and Leoni, 2017)
8 COSO 1 if the company uses COSO as the ERM framework and 0 if otherwise (Pérez-
Cornejo et al., 2019)
9 ISO 1 if the company uses ISO as an ERM framework and 0 if otherwise
10 AdvERM 1 if the ERM score minimal 4 based on 7 components and 0 if otherwise (Florio and
Leoni, 2017; Pérez-Cornejo et al., 2019)
11 ESG ESG from Thomson Reuters (Buallay, 2019; Garcia et al., 2017; Sassen et al., 2016)
12 BODSize The number of members of the boards, where 3 if a total of 5–10 members, 2 if 11–15
members and 1 if board members of more than 15 people or less than 5 people (Florio
and Leoni, 2017)
13 BODMeet The number of meetings of the board, where 3 if the number of meetings is more
than six times, 2 if the number of meetings 4–6 times and 1 if the number of
meetings is fewer than 4 times (Florio and Leoni, 2017)
14 BODInd Percentage of independent board members (Florio and Leoni, 2017)
15 Size Natural logarithm of total assets (Farrell and Gallagher, 2019; Buallay, 2019; Florio
and Leoni, 2017; Garcia et al., 2017; Sassen et al., 2016)
16 Lev Total liabilities to total assets (Farrell and Gallagher, 2019; Garcia et al., 2017; Sassen
et al., 2016)
17 Inflation Inflation level (Farrell and Gallagher, 2019; Garcia et al., 2017; Sassen et al., 2016)
18 GDP GDP growth from World Bank (Jubaedah et al., 2016) Table 2.
19 Industry 1 if the company operates in sensitive industries and 0 if otherwise (Sassen et al., Definition of
2016; Garcia et al., 2017) variables

studies have reached the consensus singles measurement that can be used to measure the
quality of ERM (Agustina and Baroroh, 2016; Lechner and Gatzert, 2018; Lai and Shad,
2017; Callahan and Soileau, 2017). According to extant studies, ERM measurements do not
yet reflect the quality of ERM measurement. For example, there are studies that only look at
whether a company applies an ERM system or not based on a “keyword search” to
determine whether the words ERM, the existence CRO or risk management committee
(Lechner and Gatzert, 2018), but these measurements cannot describe the level of ERM
quality. Other studies have also measured the rate of adoption of ERM using survey-based
scales (Lai and Shad, 2017; Callahan and Soileau, 2017); unfortunately, this type of
measurement only allow for cross-sectional analysis. In addition, there are other studies that
analyze ERM using ERM guidelines (Agustina and Baroroh, 2016), but it turns out this is
not able to describe ERM measurements across companies in different sectors. Considering
the limitations of the previous measurements, we relate the concepts of governance and
operational mechanisms of ERM that focus on frequency, depth and risk assessment
methodologies (Florio and Leoni, 2017) as ERM measurement.
MEDAR We use andESG performance as a moderating variable, which was obtained from
29,3 Thomson Reuters. ESG are factors in investment considerations used in ESG risk
assessment strategies that are incorporated into investment decisions and risk
management processes (World Wide Fund for Nature-WWF Report, 2014). Thomson
Reuters (2017) says that ESG Scores were designed to transparently and objectively
measure a company’s relative ESG performance with themes that reflect problems s
656 emissions, environmental product innovation, human rights and shareholders, among
others, based on company reported data. The governance risks discussed throughout the
ESG tend to focus on either the governance of environmental or social issues or other
issues that have recently gained interest in the business community such as business
ethics or diversity on boards (COSO and WBCSD, 2018; MSCI, 2019). Thus, the
governance aspect in ESG measurement is different from the ERM measurement used in
our study.
We also include dummy variables to distinguish between sensitive and non-sensitive
industries, where 1 if companies operate in sensitive industries (which include energy
companies, industrial, materials, utilities, financial institutions and customer staplers) and 0
if otherwise (which include communication services, consumer discretionary, information
technology, health care and real estate).
In addition, the control variable consists of governance characteristics, company
characteristics and country characteristics [1]. The characteristics of governance are the
percentage of independent boards (BODInd), the number of board members (BODSize) and
the number of board meetings (BODMeet). Corporate characteristics are the company’s total
assets (SIZE) and leverage (LEV). Country characteristics consist of economic growth (GDP)
and inflation (INFLATION). For more details, the definitions of the variables are presented
in Table 2.

Research model
We expect that there is a positive effect of ERM on financial performance and firm value and
a positive moderating role of ESG on the relationship between ERM and financial
performance and firm value. We further expect that the effect is stronger in sensitive
industries than in non-sensitive industries. Our research models are as follows:
Model (1) and (2) to test H1a and H1b:

ROAijt ¼ a 0 þ a 1AdvERMijt þ a 2 ESGijtþ a 3 Industryijtþ a 4 BODSizeijt

þ a 5 BODIndijt þ a 6BODMeetijt þa7Sizeijt þa8Levijt þa9Inflationjt
X2018
þ a10GDPijt þ ðt¼2015Þ atYear þ « ijt (1)

TobinsQit ¼ a0 þ a1AdvERMijt þ a2ESGijt þ a3 Industryijt þ a4 BODSizeijt

þ a5 BODIndijt þ a6 BODMeetijt þ a7 Sizeijt þ a8 Levijt
þa9 Inflationjt þ a10 GDPijt þ « ijt (2)

Model (3) and (4) to test H2a and H2b:

ROAit ¼ a0 þ a1AdvERMijt þ a2 ESGijt þ a3 Industryijt þ a4 AdvERMijt *ESGijt

þa5 BODSizeijt þ a6 BODIndijt þ a7 BODMeetijt þ a8 Sizeijt
 þ a9 Levijt þ a10 Inflationjt þ a11 GDPijt þ « ijt (3) Environm
ental, social
TobinsQit ¼ a0 þ a1AdvERMijt þ a2ESGijt þ a3AdvERMijt *ESGijt þ a4 BODSizeijt and
þ a5 BODIndijt þ a6 BODMeetijt þ a7 Sizeijt þ a8 Levijt þ a9 Inflationjt governance
þ a10 GDPijt þ a11 Industryijt þ « ijt (4)
657
Model (5) and (6) to test H3a and H3b:

ROA ¼ a0 þ a1AdvERMijt þ a2ESGijt þ a3AdvERMijt *ESGjt

þ a4AdvERMijt *ESGijt *Industryijt þ a5 BODSizeijt þ a6 BODIndijt
þ a7 BODMeetijt þ a8 Sizeijt þ a9 Levijt þ a10 Inflationjt þ a11 GDPijt
þa12 Industryijt þ « ijt (5)

TobinsQ ¼ a0 þ a1AdvERMijt þ a2ESGijt þ a3AdvERMijt *ESGjt

þ a4AdvERMijt *ESGijt *Industryijt þ a5 BODSizeijt þ a6 BODIndijt
þ a7 BODMeetijt þ a8 Sizeijt þ a9 Levijt þ a10 Inflationjt þ a11 GDPijt
þa12 Industryijt þ « ijt (6)

where i denotes an individual firm, j denotes country and t denotes year. Definitions of
variables can be seen in Table 2. We include firm fixed effects and year fixed effects in
above research models.
It is possible that the adoption of ERM does not contemporaneously translate into higher
performance and thus we further analyze the effect of ERM on next year’s performance and
firm value. We used fixed effect panel regression to run the above models [2].

Results and discussion

Descriptive statistics
Table 3 Panel A is the result of a descriptive statistics of 680 observations over a five-year
period (2014 to 2018). We can see that the mean of ROA is 5.47% and this shows that on
average our samples of ASEAN 5 listed firms are profitable firms. The Tobin’s Q value has
a mean of 1.58, indicating that investors perceive the value of the company is higher than the
book value of the assets, so, on average, the investment opportunities of our samples are
high. The AdvERM risk management shows that less than 50% of our samples have good
ERM implementation. ESG performance is quite good, where the mean is 51.16 out of 100.
This indicates quite high commitment, performance and effectiveness of the company in all
three aspects.
Table 3 also describes descriptive statistics for each of the ASEAN 5 countries. The
AdvERM values show that the proportion of firms with good ERM implementation is
highest in Malaysia, followed by Thailand, Indonesia, Singapore and the Philippines. Where
the ESG is higher in Thailand, followed by Malaysia, Indonesia, the Philippines and
Singapore. Country-level variables, including GDP growth and inflation, also show variation
among our country samples.
Figure 1 presents the ERM trend during 2014–2018. The figure shows the percentages of
our samples for each seven components of AdvERM, as well as the total AdvERM. We can
see that overall, there is an increasing trend of ERM implementation, even though several
 29,3

658

Table 3.
MEDAR

Descriptive statistics
Variable Mean SD Min Max Q1 Median Q3

Panel A: All samples

ROA 0.054766 0.0597445 0.0025 0.954 0.01975 0.04095 0.0744
TOBINSQ 1.588162 1.063404 0.4651022 13.9246 0.9985917 1.168922 1.836468
ADVERM 0.4850746 0.5001506 0 1 0 0 1
ESG 51.16065 16.24409 11.75 88.65 39.415 51.505 63.535
BODIND 0.4809564 0.167130 0.083 0.916 0.3333 0.50 0.60
BODSIZE 2.514706 0.6210032 1 3 2 3 3
BODMEET 2.544118 0.5215199 1 3 2 3 3
SIZE* 3,145 1.402694 350 332,477 3,055 7,322 25,627
LEV 0.6041029 0.2224103 0.03 0.95 0.43 0.61 0.79
GDP 4.582725 1.326034 0.984414 6.884055 3.699782 4.876322 5.897009
INFLATION 2.072657 1.969916 0.900425 6.394926 0.5763247 1.895142 3.525805
Panel B: Indonesia
ROA 0.0900062 0.1084871 0.009 0.954 0.03 0.0611 0.1131
TOBINSQ 1.945168 1.629929 0.5300389 13.92468 1.132009 1.427656 2.174128
ADVERM 0.4923077 0.5018748 0 1 0 0 1
ESG 49.60115 17.95374 13.03 85.3 34.62 52.655 63.3
BODIND 0.4493623 0.1294888 0.25 0.833 0.3333 0.4142 0.50
BODSIZE 2.676923 0.7176122 1 3 3 3 3
BODMEET 2.430769 0.6092117 1 3 2 2 3
SIZE 4,702 1.399794 350 64,780 1,796 3,617 15,814
LEV 0.555 0.2204479 0.13 0.95 0.38 0.54 0.78
GDP 5.030947 0.0957868 4.876322 5.17127 5.0066 5.0330 5.0674
INFLATION 4.658199 1.423792 3.198346 6.394926 3.525805 3.808798 6.363121
Panel C: Malaysia
ROA 0.0434518 0.0367419 0.005 0.164 0.013 0.02935 0.0713
TOBINSQ 1.453579 0.7498946 0.6292641 3.46921 0.9685327 1.047139 1.930341
ADVERM 0.5647059 0.4972602 0 1 0 1 1
ESG 51.28341 13.69098 18.69 79.07 40.21 51.96 62.3
BODIND 0.503551 0.128423 0.2222 0.80 0.4285714 0.50 0.5714286
BODSIZE 2.729412 0.4586637 1 3 2 3 3
BODMEET 2.605882 0.4901039 2 3 2 3 3
SIZE 6,153 1.425196 589 183,204 9,047 12,991 23,278
(continued)
Variable Mean SD Min Max Q1 Median Q3

LEV 0.6065882 0.2376714 0.08 0.94 0.43 0.60 0.88

GDP 5.188458 0.6844202 4.22341 6.006722 4.723634 5.091516 5.897009
INFLATION 2.418772 1.02222 0.0047092 3.871201 2.090567 2.10439 3.142991
Panel D: Philippines
ROA 0.0459027 0.0247954 0.004 0.1129 0.0273 0.0454 0.0649
TOBINSQ 1.490412 0.6688074 0.4651022 4.141168 1.061466 1.330768 1.68604
ADVERM 0.2909091 0.4562603 0 1 0 0 1
ESG 49.34109 16.65764 16.15 88.09 37.51 48.625 62.43
BODIND 0.3015559 0.093796 0.0833 0.5714 0.2222 0.2857 0.375
BODSIZE 2.418182 0.580759 1 3 2 2 3
BODMEET 2.80 0.4018307 2 3 3 3 3
SIZE 8,143 0.9421337 2,169 41,645 7,426 10,773 19,210
LEV 0.6871818 0.1341171 0.28 0.91 0.58 0.69 0.77
GDP 6.403439 0.3213912 6.066549 6.884055 6.145299 6.243738 6.677554
INFLATION 2.718101 1.64037 0.6741925 5.211605 1.253699 2.853188 3.597823
Panel E: Singapore
ROA 0.0467994 0.0396028 0.0025 0.2044 0.02 0.0343 0.0609
TOBINSQ 1.341624 0.7774982 0.6815474 5.547907 0.9503765 1.034012 1.400446
ADVERM 0.4787879 0.5010705 0 1 0 0 1
ESG 48.86703 17.15712 11.75 88.65 36.31 44.79 61.93
BODIND 0.6275927 0.1550155 0.22222 0.91666 0.50 0.6363636 0.7142857
BODSIZE 2.642424 0.4932658 1 3 2 3 3
BODMEET 2.224242 0.4183521 2 3 2 2 2
SIZE 6,443 1.526799 819 32,477 3,679 7,437 20,682
LEV 0.5352727 0.2390774 0.03 0.93 0.36 0.51 0.74
GDP 3.318929 0.4073331 2.892499 3.900573 2.962327 3.139465 3.699782
INFLATION 0.1969575 0.6244182 –0.532286 1.024983 –0.522752 0.4385186 0.5763247
Panel F: Thailand
ROA 0.0512629 0.0378998 0.0071 0.1375 0.0135 0.0429 0.0821
TOBINSQ 1.853871 1.1769 0.5932538 5.83735 1.028876 1.249166 2.437091
ADVERM 0.5619048 0.4985326 0 1 0 1 1
ESG 58.40314 13.98108 20.39 82.92 46.38 60.25 68.42
BODIND 0.4410059 0.1257261 0.25 0.80 0.33333 0.38888 0.53334
(continued)
ental, social

Table 3.
659
governance
and
Environm
 29,3

660

Table 3.
MEDAR

Variable Mean SD Min Max Q1 Median Q3

BODSIZE 1.866667 0.481717 1 3 2 2 2

BODMEET 2.819048 0.3868252 2 3 3 3 3
SIZE 12,606 1.390737 1,565 82,057 3,257 13,362 68,581
LEV 0.682 0.1947651 0.23 0.92 0.55 0.68 0.88
GDP 3.125622 1.141459 0.984414 4.129226 3.133897 3.356489 4.024086
INFLATION 0.5824792 0.9335699 –0.900425 1.895142 0.1881497 0.6656319 1.063897

Note: *in millions US$ (000.000)

components (i.e. RAfreq, RAlevel and ISO) do not consistently show an increasing trend. Environm
Figure 2 presents the ESG trend during our research period, which also shows an increasing ental, social
trend, albeit somewhat decreased in 2017.
Table 4 reports the cross-correlations of the variables. We note that ROA and Tobin’s Q
and
have a significant positive correlation with AdvERM, ESG and AdvERM*ESG. These governance
findings show initial support for our hypotheses.

Regression results
661
Regression results for H1 and H2 are reported in Table 5. With respect to the estimation
method, we used the fixed-effect model with a robust standard error clustered by firm.
From the regression results in Table 5, we can see that the effect of the AdvERM, which
is the primary variable in model (1) and (2), is statistically significant after controlling for
other factors. H1a and H1b are supported. These results consistent with other studies, i.e.
Alawattegama (2018), Bowling and Rieger (2005), Beasley (2008), Gates (2006), Manab et al.
(2010), McShane et al. (2011), Pagach and Warr (2010), Rochette (2009), Senol and Karaca
(2017) and Tahir and Razali (2011).
There are many advantages of having ERM, including better risk-return decisions, more
efficient capital allocation, reduced earnings volatility, increasing stock prices, creating
synergies for risk management activities that differ between divisions, saving costs by
avoiding duplication of risk-related expenses and improving senior management and
oversight of risk-related board (Farrell and Gallagher, 2019). Eckles et al. (2014) also suggest
that adopting ERM will increase company profits as ERM provides companies with reliable
risk management and adequate risk policies that play a role in improving financial
performance. In addition, ERM will have a positive impact in improving shareholders’
confidence (Agustina and Baroroh, 2016). ERM creates value for shareholders by increasing
the visibility of risk and return of choices from various projects and assist in making
strategic plans and revealing exposure to all company risks and ultimately increasing the
company’s competitive advantage (Nocco and Stulz, 2006).

Figure 1.
ERM trend 2014–
2018
MEDAR
29,3

662

Figure 2.
ESG trend 2014–2018

The results for model (3) and (4) in Table 5 show the positive significant effect of
AdvERM*ESG on financial performance (ROA) and firm value (Tobin’s Q). Thus, ESG is
used in risk assessment strategies incorporated into both investment decisions and risk
management processes through ERM (Dunn et al., 2017; Parfitt, 2019). This is also
consistent with Gordon et al.’s (2009) claim that the effect of ERM on performance is
contingent on other factors, which in our study is ESG. Our findings also corroborate Shad
et al.’s (2019) conceptual framework, which suggests that the combination of both internal
and external factors (in this case ESG) with ERM can provide a stronger effect than the sum
of their separate effects (Shad et al., 2019).
In relation to the results of H2, COSO and WBCSD (2018) stated that 10 years ago, the top
global risks did not cover social and environmental problems, but today the main risks faced
by companies are related to social and environmental problems. These social and
environmental problems occur due to the inappropriate use of natural resources and
production activities that have an impact on environmental pollution; this is done solely to
get maximum benefit. With the increase in environmental and social risks, the role of
governance becomes an important factor to be carried out, such as increasing internal and
cultural oversight to manage these risks. With the important role of ERM and the magnitude
of potential risks arising from social, environmental and governance issues, improving the
quality of ESG performance and analyzing related risks is necessary.
Table 6 presents the results for sensitive and non-sensitive industries. The effect of the
AdvERM*ESG*Industry is significant on financial performance (ROA), while the effect of
the AdvERM*ESG*Industry on firm value (Tobin’s Q) is insignificant. This finding
indicates that the moderating role of ESG is stronger for sensitive industries, in the case of
performance is measured using accounting performance. It seems that investors do not
perceive any differences between sensitive industries and non-sensitive industries. This
findings indicate that investors believe that both type of industries need to consider the
moderating role of ESG.
Variables Tobin’sQ ROA ADVERM ESG ADVERM*ESG BODIND BODSIZE BODMEET SIZE LEV INFL GDP

Tobin’s Q
ROA 0.830
ADVERM 0.103 0.057
ESG 0.133 0.104 0.365
ADVERM*ESG 0.110 0.050 0.943 0.550
BODIND 0.153 0.205 0.274 0.197 0.268
BODSIZE 0.008 0.060 0.048 0.066 0.032 0.320
BODMEET 0.057 0.118 0.250 0.201 0.275 0.063 0.152
SIZE 0.519 0.624 0.273 0.216 0.274 0.339 0.118 0.210
LEV 0.179 0.373 0.119 0.086 0.132 0.099 0.188 0.243 0.593
INFLATION 0.165 0.207 0.019 0.079 0.006 0.499 0.174 0.045 0.155 0.005
GDP 0.037 0.054 0.081 0.069 0.055 0.464 0.139 0.174 0.072 0.080 0.556

Notes: Pearson (Spearman) correlation coefficients are presented below (above) the diagonal line. Italic number denote correlations significant at least at 5%
level

Correlation matrix
ental, social

Table 4.
663
governance
and
Environm
MEDAR Variables Expected sign (1) ROA (2) Tobin’s Q (3) ROA (4) Tobin’s Q
29,3
ADVERM H1a/b: þ 0.005 (0.091*) 0.117 (0.053**) 0.005 (0.274) 0.316 (0.096*)
ESG þ 0.000 (0.206) 0.003 (0.150) 0.000 (0.096*) 0.008 (0.077*)
ADVERM*ESG H2a/b: þ 0.000 (0.095*) 0.008 (0.046**)
BODIND þ 0.001 (0.171) 0.034 (0.192) 0.001 (0.0.159) 0.036 (0.0.172)
BODSIZE þ 0.001 (0.414) 0.057 (0.206) 0.001 (0.398) 0.061 (0.184)
664 BODMEET þ 0.006 (0.035**) 0.176 (0.108) 0.006 (0.033**) 0.180 (0.104)
SIZE þ 0.002 (0.425) 0.785 (0.023**) 0.002 (0.425) 0.785 (0.022**)
LEV þ 0.085 (0.038**) 1.347 (0.255) 0.086 (0.034**) 1,287 (0.261)
GDP þ 0.000 (0.122) 0.000 (0.428) 0.000 (0.106) 0.000 (0.361)
INFLATION þ 0.000 (0.446) 0.020 (0.275) 0.000 (0.424) 0.023 (0.250)
Firm Effects Yes Yes Yes Yes
Year Effects Yes Yes Yes Yes
Constant 0.076 (0.753) 19.139 (0.022**) 0.082 (0.367) 19.381 (0.011**)
Table 5. N 680 680 680 680
2
Multivariate analysis R 0.084 0.115 0.087 0.122
F 4.141*** 5.527*** 3.941*** 5.090***
of ERM on firm
performance ROA Note: ***, ** and * indicate statistical significance at the 1%, 5% and 10% levels, respectively (regression
and Tobin’s Q coefficients below the t-values in parentheses)

Variables Expected Sign (5) ROA (6) Tobin’s Q

ADVERM þ 0.006 (0.245) 0.318 (0.097*)

ESG þ 0.000 (0.076*) 0.008 (0.079*)
ADVERM*ESG þ 0.000 (0.190) 0.008 (0.046**)
ADVERM*ESG*INDUSTRY H3a/b: þ 0.000 (0.099*) 0.000 (0.426)
BODIND þ 0.001 (0.161) 0.036 (0.172)
BODSIZE þ 0.001 (0.396) 0.061 (0.184)
BODMEET þ 0.006 (0.034**) 0.180* (0.104)
SIZE þ 0.002 (0.419) 0.785 (0.022**)
LEV þ 0.086 (0.033*) 1.287 (0.261)
GDP þ 0.000 (0.100) 0.000 (0.359)
INFLATION þ 0.000 (0.403) 0.023 (0.249)
Firm Effects Yes Yes
Table 6. Year Effects Yes Yes
Multivariate analysis Constant 0.079 (0.742) 19.371 (0.021**)
of ERM on firm N 0.079 (0.742) 19.371 (0.021**)
R2 680 680
performance ROA
F 0.089 0.122
and Tobin’s Q in
sensitive and non- Note: ***, ** and * indicate statistical significance at the 1%, 5% and 10% levels, respectively (regression
sensitive industries coefficients below the t-values in parentheses)

The above analysis assumes that the effect of ERM, as well as the moderating role of ESG on
firm performance and firm value occur contemporaneously. To alleviate the concern that the
effect may take longer, we analyze the effect of ERM on next year’s performance with
dependent variables ROA and Tobin’s Q (t þ 1). The results are presented in Tables 7 and 8.
For the results in Table 7, the effect of the AdvERM, which is the primary variable in the
model, is insignificant. The results of AdvERM*ESG also show insignificant results. Thus,
the effect of ERM and the moderating role of ESG occur contemporaneously.
 We also rerun the models for sensitive and non-sensitive industry for ROA and Tobin’s Environm
Q (t þ 1), which can be seen in Table 8. The results show that the moderating role of ESG is ental, social
only significant in sensitive industries (specifically on firm value). This result is different
with the main analysis where the significant effect is observed when the dependent
and
variables is firm performance (ROA). It indicates that it takes longer for investors to react as governance
they wait the benefits of ERM implementation and ESG are actually realized. The results for
sensitive industries support the stakeholder theory and legitimacy theory, as well as
previous studies by Cai et al. (2012), Lin et al. (2015) and Garcia et al. (2017); sensitive
665

Variables Expected Sign ROA (t þ 1) Tobin’s Q (t þ 1) ROA (t þ 1) Tobin’s Q (t þ 1)

ADVERM H1a/b: þ 0.001 (0.384) 0.029 (0.374)

0.005 (0.282) 0.254 (0.114)
ESG þ 0.000 (0.073*) 0.004 (0.157) 0.000 (0.079*) 0.006 (0.136)
ADVERM*ESG H2a/b: þ 0.000 (0.218) 0.004 (0.143)
BODIND þ 0.001 (0.229) 0.043 (0.188) 0.001 (0.228) 0.043 (0.186)
BODSIZE þ 0.003 (0.202) 0.027 (0.398) 0.003 (0.205) 0.025 (0.404)
BODMEET þ 0.001 (0.450) 0.127 (0.163) 0.001 (0.455) 0.124 (0.164)
SIZE þ 0.043 (0.014**) 1.002 (0.093*) 0.043 (0.014**) 1.003 (0.093*)
LEV þ 0.084 (0.145) 3.340 (0.165) 0.083 (0.146) 3.306 (0.166)
GDP þ 0.000 (0.178) 0.000 (0.446) 0.000 (0.183) 0.000 (0.441)
INFLATION þ 0.002 (0.168) 0.007 (0.374) 0.000 (0.171) 0.008 (0.367)
Firm Controls Yes Yes Yes Yes
Year Controls Yes Yes Yes Yes
Constant 0.998 (0.015**) 22.886 (0.148) 1.002 (0.015**) 23.028 (0.147) Table 7.
N 544 544 544 544 Multivariate analysis
R2 0.090 0.127 0.081 0.129
of ERM on next year
F 2.253** 2.536*** 2.133** 2.431***
firm performance
Note: ***, ** and * indicate statistical significance at the 1%, 5% and 10% levels, respectively (regression ROA(t þ 1) and
coefficients below the t-values in parentheses) Tobin’s Q(t þ 1)

Variables Expected Sign ROA (t þ 1) Tobin’s Q (t þ 1)

ADVERM þ 0.006 (0.276) 0.267 (0.108)

ESG þ 0.000 (0.076*) 0.007 (0.128)
ADVERM*ESG þ 0.000 (0.271) 0.002 (0.273)
ADVERM*ESG*INDUSTRY H3a/b: þ 0.000 (0.268) 0.004 (0.072*)
BODIND þ 0.001 (0.235) 0.041 (0.189)
BODSIZE þ 0.003 (0.204) 0.027 (0.399)
BODMEET þ 0.001 (0.452) 0.127 (0.159)
SIZE þ 0.042 (0.0155**) 0.987 (0.095*)
LEV þ 0.083 (0.146) 3.305 (0.166)
GDP þ 0.000 (0.186) 0.000 (0.435)
INFLATION þ 0.002 (0.180) 0.011 (0.319)
Firm Controls Yes Yes Table 8.
Year Controls Yes Yes Multivariate analysis
Constant 0.966 (0.008***) 22.671 (0.151) of ERM on firm
N 544 544 performance ROA
R2 0.081 0.133
(t þ 1) and Tobin’s Q
F 2.159** 2.333***
(t þ 1) in sensitive
Note: ***, ** and * indicate statistical significance at the 1%, 5% and 10% levels, respectively (regression and non-sensitive
coefficients below the t-values in parentheses) industries
MEDAR industries are those with higher pressure to consider sustainability in every aspect of their
29,3 business and investors demand such actions from the companies.

Conclusion
Our study aims to examine the effect of ERM on financial performance and firm value,
moderated by the quality of the ESG components on the effect of ERM on financial
666 performance and firm value and its influence in the sensitive and non-sensitive industries in
the 2014–2018 period. We find that ERM has a positive significant effect on financial
performance and firm value. We also find that ESG has a significant moderating role. ESG
refers to the performance of andESG aspects: it implies that a strong ERM framework
prioritizes risks related to ESG aspects, which will further assist companies in creating
responsible decision-making strategies to achieve higher financial performance and
corporate value. However, the significant effect of ESG as a moderating variable primarily
occurs in sensitive industries.
There are several limitations of this study. First, we have not considered the ERM
maturity aspect that can affect a company’s performance and value. Different levels of ERM
maturity will have an impact on differences in financial performance and firm value. Second,
we have only examined the impact on the company’s performance and value, but it is
possible that ESG and ERM also have a positive impact on the company’s reputation. Third,
the number of samples is limited due to the limited number of firms in ASEAN 5 countries
that have ESG data. Therefore, the research sample can be extended again to other regions
that have ESG data.
With the limitations described in the previous section, suggestions for future research are
as follows. First, further research can develop other ERM measurements by looking at the
level of ERM maturity (ERM Maturity) in a way that is similar to the research of Farrell and
Gallagher (2019). Second, future studies can look at the effect of ERM on company
reputation, as in Pérez-Cornejo et al. (2019). Third, further research can be carried out in
other countries that have ESG data. Fourth, even though we already consider the possible
lag time of the effect of ERM on firm performance and firm value, we only examine them for
t þ 1. It is possible that the effect may be different if we consider longer periods. The lag
tests may also provide evidence to overcome reverse causality problems. However, we
cannot rule out the possibility of reverse causality.
Based on these results, there are several important practical implications. We found the
moderating role of ESG in increasing the positive influence of ERM on financial
performance and firm value. This implies that ESG is increasingly needed by companies
and investors. Companies must be more aware of how to apply ESG to their business
activities so that they always consider andESG risks in achieving good performance and
this consideration of ESG also assist investors to analyze their investment decision. Our
findings also indicate that sensitive industries should be more concerned about ESG.

Notes
1. Adding control variables can also serve as a correction for the issue of endogeneity if the bias
from endogeneity is derived from variable omission (Esping-Andersen and Przeworski, 2001).
2. According to Ebbes et al. (2016), the endogeneity problem can be addressed by adding fixed
effects (dummies for each cross-sectional unit) as additional covariates, if unobserved factors are
concentrated in unobserved cross-sectional differences between firms.
3. Outliers are any values that are greater than 2 standard deviations from mean
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Corresponding author
Sylvia Veronica Siregar can be contacted at: [email protected]

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