Journal of Accounting and Investment Vol. 24 No.

1, January 2023

Article Type: Research Paper

The Influence of Environmental, Social, and

Governance Performance on Foreign
Investment
Amalia Siti Khodijah

Abstract
Research aims: This study aims to investigate the effect of environmental, social,
and governance (ESG) performance on foreign investment through corporate
AFFILIATION:
reputation.
Master in Accounting, Faculty of
Design/Methodology/Approach: This study’s population was all non-financial
Economics and Business,
Universitas Gadjah Mada, Special companies listed on Indonesia Stock Exchange from 2015 to 2019. Moreover, the
Region of Yogyakarta, Indonesia hypotheses testing technique used was Two-Stage Least Square (2SLS), with 150
observations distributed in balanced panel data. In addition, additional analysis
*CORRESPONDENCE: was conducted to examine how each company paid attention to ESG practices
[email protected] based on its industry classification through descriptive statistical analysis.
Research findings: The regression results revealed that companies with good ESG
DOI:10.18196/jai.v24i1.16033
performance tended to have a high level of foreign investment. However, it could
not be explained by the corporate reputation. In an additional test, this study
CITATION:
Khodijah, A. S. (2023). The documented that the mining industry had a much better ESG performance than
Influence of Environmental, Social, other industrial groups.
and Governance Performance on Theoretical contribution/Originality: This study pays attention to foreign
Foreign Investment. Journal of investment through trading domestic equity shares, whereas previous studies
Accounting and Investment, 24(1), only focused on ESG practices in the FDI process. In addition, this study examined
64-83. corporate reputation in explaining the relationship.
Practitioner/Policy implication: The research results can be used by standard
ARTICLE HISTORY
setters in developing sustainability disclosure standards in Indonesia, which
Received:
International Sustainability Standards Board is currently initiating.
31 Aug 2022
Revised: Research limitation/Implication: The weakness in this study is the small number
12 Sep 2022 of samples employed in the test due to the minimal availability of ESG data in the
Accepted: database.
06 Oct 2022 Keywords: Foreign investment; ESG performance; Corporate reputation;
Impression management
This work is licensed under a Creative
Commons Attribution-NonCommercial-

Introduction
NoDerivatives 4.0 International License

JAI Website:

This study examines the relationship between environmental, social, and

governance (ESG) performance and foreign investment through corporate
reputation in the case of cross-listed firms on the Indonesia Stock Market.
Foreign investment is now a focus for many developing countries to help
stabilize the economy through capital distribution across countries. Over
the past few decades, the wave of stock market liberalization across the
globe has dramatically increased capital mobility and foreign investment
(Tsang et al., 2019). High capital mobility allows investors to invest in
more productive countries.
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The Influence of Environmental, Social, and Governance …

The extent of this foreign capital mobilization is intensified in developing countries,

especially in economies in Asian markets, such as Indonesia (Chairani & Siregar, 2021).
Based on Bloomberg data collected as of September 2020, Indonesia had the second
fastest economic growth in the G-20 from 2012 to 2020 (Wiguna, 2020). Moreover,
Indonesia has potential natural resources coupled with a strategic geographical location
and owns a good human development index to become an attractive investment target
for various global investors (Deloitte, 2021). Thus, it encourages managers in Indonesia to
take diverse ways to attract foreign investors in their long-term funding.

However, in attracting foreign investment, companies in Indonesia are constantly faced

with a legitimacy deficit (Liu et al., 2021). According to the Investment Coordinating Board
(BKPM), from 2014 to 2019, the average FDI inflow to Indonesia was only 1.9% of the
Gross Domestic Product (GDP) (BKPM, 2020), far below other ASEAN countries, such as
Cambodia (11.8% of GDP), Vietnam (5.9% of GDP), Malaysia (3.5% of GDP), and Thailand
(2.6% of GDP) (Meilani, 2019). In fact, in the first quarter of 2019, Indonesia's FDI was
recorded at USD6.08 billion, experiencing a slowdown (-0.9%) compared to the first
quarter of 2018. It could happen because of the many negative governances and
environmental and social issues that reduce investor confidence in investing in the
Indonesian capital market. In addition, Indonesia is a developing country with various
economic, social, and environmental problems, such as high corruption cases, gender
inequality, recruitment of minors, and various environmental issues, for instance, plastic
waste, smog, river pollution, and forest fires (Tjahjadi et al., 2021). Furthermore, the high
level of information asymmetry in developing countries tends to reduce the confidence
of foreign investors in considering investment opportunities in developing countries, such
as Indonesia (Subramaniam et al., 2016). Therefore, sustainable practices and good
governance, such as environmental, social, and governance (ESG) practices, are needed
to gain global investors' trust and compete in the worldwide market (Bell et al., 2012).

Liu et al. (2021) have shown that in attracting foreign investment, managers should pay
attention to non-financial performance, such as environmental, social, and governance
(ESG) responsibility practices, because they can help companies gain a good reputation
and be profitable for global stakeholders. In addition, Chipalkatti et al. (2021) argued that
ESG practices contributed significantly to the internationalization process, such as FDI
(Foreign Direct Investment), by establishing a good reputation. Environmental, social, and
governance (ESG) factors are also among the things that global investors consider (Liu et
al., 2021; Evans & Peiris, 2010). Besides, ESG implementation demonstrates business
management activities that care about environmental sustainability, social welfare in the
company environment, and good governance practices (Liu et al., 2021). Further, ESG
implementation can answer the challenges of the times, which are increasingly
responding to increasing environmental awareness and stakeholder interests. Therefore,
implementing ESG in a company will be an attractive factor in global investment appraisal.

Nevertheless, previous studies only used FDI as a proxy for foreign investment.
Meanwhile, responsible and sustainable practices, such as good ESG practices, are also
greatly concerned by various global investors, including trading domestic equity shares.
In addition, prior research has not empirically assessed the role of impression

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management in ESG practices by testing the corporate reputation as a mediator in the

relationship between ESG performance and foreign investment. Furthermore, several
studies that have empirically examined ESG practices' relationship with corporate
reputation provided inconsistent results. On the one hand, several previous studies have
shown that responsible practices positively affect corporate reputation (Galbreath, 2010;
Hsu, 2012; Ionescu et al., 2019; Lai et al., 2010; Pham & Tran, 2020; Saeidi et al., 2015).
On the other hand, Andayani (2021) and Axjonow et al. (2016) have proven that
sustainable practices do not affect corporate reputation. Based on the existing research
gaps, this study is motivated to examine whether ESG performance in Indonesia can
increase foreign investment (proxied by foreign-owned shares) and whether the
relationship is explained by the corporate reputation, which is claimed to be the benefit
of impression management strategy of ESG practices.

By adding empirical evidence of the associations between ESG performance and foreign
investment, this research contributes in several ways. First, this study expands the capital
market literature regarding foreign investment by implementing environmentally,
socially, and governance-responsible practices. Mainly, previous studies have employed
FDI as a proxy for foreign investment (Liu et al., 2021) and used company external factors,
such as state policies (Blakey, 2020; Zhang, 2020) and regional tax incentive opportunities
(Hadjilogiou et al., 2020) as determinants of foreign investment research topics. Second,
this study adds to the literature in developing countries on increasing foreign investment.
In this case, foreign investment in developing countries is rising, which shows the
importance of foreign investment for developing countries to help economic stability.
Third, the results of this study provide input to standard setters and managers to
maximize ESG performance to establish good corporate governance and reputation to
attract foreign investors.

Literature Review and Hypotheses Development

Regulatory Setting for Sustainable Development in Indonesia

In Indonesia, the progression of the sustainable development concept is policed in several

regulations, such as Law No. 40 of 2007 Article 74 concerning Limited Liability Companies.
It explains that companies that conduct their business activities in the field of and/or
related to natural resources are required to perform social and environmental
responsibilities. In addition, Government Regulation Number 47 of 2012 Article 3 also
states that social and environmental responsibility is an obligation for companies that run
their business in the field of natural resources. However, regulations regarding
implementing sustainable practices are only mandatory recommendations and are not
accompanied by structured guidelines on how these sustainable practices should be
reported and disclosed. The structured guidelines on sustainable reporting in Indonesia
have then been prepared and stipulated by the Financial Services Authority in OJK
Regulation No. 51/POJK.03/2017 concerning the Implementation of Sustainable Finance
for Financial Service Institutions, Issuers, and Public Companies. Still, this regulation is

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only explicitly applied to financial service institutions, and no regulations and guidelines
are used for publicly listed companies in the non-financial sector.

Meanwhile, in the world, the progression of sustainable economic development today is

still rolling and growing gradually. On November 3, 2021, the IFRS Foundation Trustees
announced the establishment of the International Sustainability Standards Board (ISSB),
tasked with developing high-quality sustainability disclosure standards to meet the
information needs of stakeholders. Then, on March 31, 2022, the ISSB issued Exposure
Draft IFRS S1 General Requirements for Disclosure of Sustainability-related Financial
Information, which is currently receiving public input on the published exposure drafts.
The exposure draft includes proposals for definitions and requirements consistent with
the IASB Conceptual Framework for Financial Reporting, IAS 1 Presentation of Financial
Statements, and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
The proposal in the exposure draft will require the entity to disclose material information
about all significant sustainability-related risks and opportunities it faces, along with
requirements and guidelines to support the disclosure of such sustainability information
(ISSB, 2022). Moreover, the Indonesian Accounting Association (IAI) is also currently
responding to the published exposure draft through the Task Force on Comprehensive
Corporate Reporting (TF CCR) (IAI, 2022).

Signaling Theory

Signal theory is based on the premise that one party (e.g., seller) has more comprehensive
information than an external party (e.g., buyer). The signal theory also explains that
investors are external parties to the company with limited information on the company's
operations and must depend on what management wants to share (Naffa & Fain, 2020).
To minimize the risk of this information asymmetry, investors will identify observable
characteristics (signals) that are likely to affect the company's financial performance in
evaluating their investment (Bergh & Gibbons, 2011). According to signal theory, good
information or signals will drive cash inflows as a form of investor confidence that the
entity is good (Bergh et al., 2014).

In addition, the signal theory provides a solution that companies can try to reduce the risk
of information asymmetry by giving good signals to stakeholders. According to Reber et
al. (2021), implementing ESG practices is one of the company's efforts to reduce the risk
of information asymmetry to stakeholders by providing compliance signals so that they
are more acceptable to the public and obtain operating permits. Moreover, the
company's ESG practices help stakeholders, as parties with few connections and access
to information, to capture the company's good intentions in responsible and sustainable
management practices (M. Zhang, 2020). Thus, the compliance signal from ESG practices
is expected to be a positive signal for investors' investment assessments and bring cash
inflows to the company's capital.

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Environmental, Social, and Governance (ESG) and Foreign Investment

The rise of social, environmental, and governance issues in the business world encourages
investors from various countries to emphasize and pay attention to environmentally,
socially, and governance-responsible business practices now as a feature of sustainable
investment (Yu et al., 2018). According to signal theory, ESG practices can signal
compliance with the norms of sustainable business behavior (Belkaoui, 1976). ESG
practices also pay attention to various environmental, social, and governance issues to
address areas characterizing sustainable, responsible, and ethical investment (Chairani &
Siregar, 2021). When an entity shows behavior that is relevant to the values in society,
the entity will get a good assessment from the public (Pham & Tran, 2020). Hence,
companies with good ESG practices can positively influence global investment valuations
since they are relevant to various countries' demands and investment environments. In
addition, high ESG performance illustrates managers' ability in the company's operational
activities because managers must have good management skills to implement good ESG
practices (Baron, 2008). ESG practices also reduce information asymmetry through more
transparent reporting (Reber et al., 2021) to help investors control the company's
performance. Thus, companies with better ESG performance tend to be more
transparent, lower risk, and reflect better and more sustainable management practices,
ultimately becoming a positive signal in global investor assessments. Therefore, investors
tend to be more attracted to companies with better ESG performance.

Chairani and Siregar (2021) documented that ESG practices in a company can be a strong
attraction for foreign investment. Further, research conducted before (Liu et al., 2021) at
the level of foreign direct investment in 44 countries revealed that high ESG scores reflect
important intangible assets and help the internationalization of companies by promising
good governance and management systems and sustainable business prospects.
Moreover, Yu and Zheng (2020) examined the impact of mandatory ESG adoption in China
by comparing the period before and after compulsory disclosure and documenting that
an increase in ESG practices after mandatory disclosure leads to an increase in the
percentage of foreign investment in firms in China. Since ESG performance is identified as
an attractive positive signal in investment appraisal, global investors tend to invest in
companies with good ESG performance. In other words, the better the ESG performance
of a company, the greater the foreign investment in the company. Thus, this study derived
the following hypothesis:

H1: Companies with better ESG performance tend to have higher foreign investment than
companies with worse ESG performance.

Environmental, Social, and Governance (ESG) and Corporate Reputation

According to signal theory, a good ESG performance can give a good signal in positively
influencing the public's assessment of a company (DasGupta, 2021). It is because ESG-
responsible practices meet the norms and values in society. Wang and Sarkis (2017) also
argued that environmentally and socially responsible practices are an opportunistic

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company strategy for building a good image and being able to cover up negative issues
inherent in the company. When a company exhibits socially and environmentally
responsible behavior, the company appears legitimate in the eyes of the public so that
people's judgments are positively influenced (Pham & Tran, 2020a). In addition,
companies with good ESG performance tend to publish more of their activities to become
a strong signal in public assessments (Reber et al., 2021). Consequently, it makes ESG
practice a good impression management strategy for companies in Indonesia to compete
globally despite the negative issues developing in Indonesia.

A recent study by Reber et al. (2021) on IPOs companies in NYSE, NASDAQ, or AMEX
supports the statement that ESG performance could build a corporate reputation. Also,
Galbreath (2010) showed that high ESG performance indicates good corporate behavior
and is consistent with stakeholder values, thereby increasing the corporate reputation.
Besides, environmentally responsible practices are a value driver in enhancing corporate
reputation (Siegel, 2009) as they positively influence stakeholder opinions (Dangelico,
2015) and offer a favorable forward-looking perspective on business sustainability
(Clarkson et al., 2004). Based on the theory and the previous research results, the
hypothesis in this study is:

H2: Companies with better ESG performance tend to have a better corporate reputation
than companies with worse ESG performance.

Corporate Reputation and Foreign Investment

The corporate reputation is a comprehensive and robust signal for investors since it
contains many dimensions, whether financial, social, or environmental, to be of concern
and assessment for stakeholders (Duque-Grisales & Aguilera-Caracuel, 2021; Barnett &
Salomon, 2006). Companies with good reputations tend to outperform those dimensions
to be superior to their competitors. They also tend to have better financial performance
and implement ethical and sustainable business practices. Therefore, investors are more
attracted to companies with good reputations because a good reputation signals
positively to various stakeholders about the company's growth prospects and ethical
business practices implemented (Reber et al., 2021) so that the public and investors
positively assess it. In addition, a favorable reputation will create good relationships with
diverse stakeholders and enable the company to gain their support, which is also a
valuable resource that strengthens the company's competitive position (Jones, 1995).
Hence, a company with a good reputation sends a positive signal to investors as it
conducts ethical business processes and becomes a profitable business opportunity.

Furthermore, Lu et al. (2018) investigated the level of foreign investment in China and
documented that the level of social trust in a region determined the level of foreign
investment entering a company. Liu et al. (2021) also uncovered that corporate
reputation plays a vital role in market internationalization efforts by companies in
developing countries that face a legitimacy deficit during the company's
internationalization process. Moreover, a positive signal of a corporate reputation can

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cover the negative issues inherent in companies in developing countries by offering an

overview of performance and ethical business practices, so they attract more foreign
investment (Wang & Sarkis, 2017). Therefore, this study proposed the following
hypothesis:

H3: Companies with better reputations tend to have higher foreign investment than
companies with poorer reputations.

Environmental, Social, and Governance (ESG), Corporate Reputation, and Foreign

Investment

According to signal theory, good ESG performance can be potential information that
positively influences the public's assessment because it addresses areas that characterize
ethical, sustainable (Zhang et al., 2021), and low-risk investment opportunities (Reber et
al., 2021). When a company demonstrates ethical behavior and meets norms, the
company appears legitimate, so the public's assessment of the company is positively
influenced (Pham & Tran, 2020). Duque-Grisales and Aguilera-Caracuel (2021) also argued
that long-term ESG initiatives could help companies achieve legitimacy and positively
impact foreign investors' valuations. In addition, companies with good ESG performance
will tend to inform ESG activities more broadly so that they can be well received and
identified by stakeholders, including investors (Reber et al., 2021). Then, it makes ESG
performance a strategy for companies to influence public perceptions and improve
corporate reputation.

Furthermore, companies with good reputations tend to be more well-received and valued
by their stakeholders, including investors (Surroca et al., 2010). Companies with good
reputations also outperform various social, environmental, and financial dimensions that
concern global investors (Duque-Grisales & Aguilera-Caracuel, 2021). Therefore, investors
tend to be more attracted to companies with good reputations because they give a
positive signal about sustainability and are considered superior to their competitors (Kaur
& Singh, 2018). Thus, it can be concluded that companies with good ESG scores will have
a good reputation and ultimately have more opportunities to be accepted by global
investors; therefore, they will have more foreign investment.

Kim et al. (2018) and Reber et al. (2021) found that ESG performance could become a
company's strategic action in improving corporate reputation. Moreover, the survey
conducted by Saeidi et al. (2015) and DasGupta (2021) on Iranian companies documented
that ESG could benefit companies by improving their reputation. Then, Rhee and
Haunschild (2006) and Lu et al. (2018) confirmed that having a good reputation could help
companies gain recognition from foreign investors. In this regard, a favorable image and
reputation will create good relationships with diverse stakeholders, strengthening the
company's competitive position (Jones, 1995). Hence, companies with good reputations
are preferred by investors as they are more profitable and sustainable. Therefore, through
the ESG demonstration, the company can gain a positive perception from the public,

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which is attractive to foreign investors. For this reason, this study derived the following
hypothesis:

H4: ESG performance affects foreign investment through the corporate reputation.

Figure 1 depicts the conceptual framework of this research based on the hypotheses
made.

Corporate Reputation

H4
H2 H3

ESG Performance Foreign Investment

H1

Control Variables:

1. Market Performance
2. Firm Size
3. Firm Value
4. Board Size
5. Independent Board

Figure 1 Conceptual Framework

Research Method
Population, Samples, and Data

The population in this study was all non-financial companies listed on the Indonesia Stock
Exchange during the 2015-2019 period. Data resources were obtained from the Thomson
Reuters database. Then, sampling in this study used the purposive sampling technique.
The sampling criteria included (1) non-financial companies listed on the Indonesia Stock
Exchange (IDX) in the study period (2015-2019), (2) the companies with ESG scores
available in the Thomson Reuters database for 2014-2018, and (3) the companies with
complete data needed for analysis, in which data were required to measure foreign

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investment and reputation in the Thomson Reuters database and financial statements for
2014-2019. Based on the criteria above, the samples obtained were from 30 companies.

Meanwhile, the total observations in this study amounted to 150, distributed as balanced
panel data. 2015 was used as the initial year of observation due to the lag of one year of
ESG data. Therefore, the ESG data used at the beginning of the observation was in 2014.
In 2014, there were many companies issued sustainability reports. It would be more
optimal in obtaining data and became the year in which the implementation of ESG
practices began to be intensified. Then, 2019 was employed as the end of the observation
period because 2019 was the latest year that research data could be used. On the other
hand, in 2020, the COVID-19 pandemic spread to all 34 provinces in Indonesia. This
pandemic has profoundly impacted the company's operational activities and the level of
foreign investment in Indonesia.

Research Model and Variables

This research used a quantitative approach. The dependent variable in this study was
foreign investment. Foreign investment is defined as foreign equity investment
represented by the total company ownership held by foreign investors. Like Chauhan and
Kumar (2019), foreign investment was measured by total foreign ownership of
outstanding shares. Meanwhile, the independent variables in this study were ESG
performance and corporate reputation (mediator). ESG performance measures were
obtained from the Thomson Reuters ASSET4 database. The values range from 0 to 100,
with 100 as the highest score. Thus, it can be easily identified the quality of the ESG
practices of each company. Then, the previous studies employed survey-based measures
for corporate reputation (e.g., Aguilera-Caracuel & Guerrero-Villegas, 2017; Kim et al.,
2021). Yet, the limitation of this method is the doubts about the credibility, applicability,
and reliability of the results when applied in the context of various countries because the
survey was conducted on people with very different economic, social, and cultural
backgrounds (Brown & Perry, 1994; Fryxell & Wang, 1994). Therefore, following Victor
and Sayilir (2020), this study used financial data to measure corporate reputation. The
corporate reputation in this study was determined by the market-to-book ratio. The
market-to-book value ratio reflects the current stock price of a company compared to the
actual amount of equity. In other words, a high market-to-book value ratio represents an
excellent public opinion about a company (Victor & Sayilir, 2020).

The summary of the variables' operational definitions is presented in Table 1. Like Pham
and Tran (2020), this study utilized the 2SLS method to test the research hypotheses due
to the possible endogeneity problems in the research model. According to Gujarati (2006),
the Two-Stage Least Square (2SLS) simultaneous regression is suitable to solve the
simultaneous equation model so that it is relevant to overcoming endogeneity problems.
Meanwhile, the Ordinary Least Square (OLS) and Fixed Effect regression cannot describe
the reciprocal relationship in the simultaneous equation system, so it is more likely to
produce biased and inconsistent estimates.

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Table 1 The Operationalization of Variables

Variable Measurement Data Resources
Dependent Variable
Foreign Investment Number of foreign-owned shares Thomson Reuters
Database
Independent Variables
ESG Performance ESG scores obtained via the Thomson Reuters Thomson Reuters
database Database
Corporate Reputation Market-to-book value ratio Thomson Reuters
Database
Control Variables
Market Performance (𝑀𝑉𝐸 + 𝐷𝐸𝐵𝑇) Thomson Reuters
𝑇𝑜𝑏𝑖𝑛′ 𝑠 𝑄 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑒𝑡 Database
Firm Size Ln (Total assets) Thomson Reuters
Database
Firm Age Ln (Number of years the company was Thomson Reuters
founded) Database
Board Size Ln (Number of the board of directors) Thomson Reuters
Database
Independent Board Number of independent directors/number of Thomson Reuters
boards Database

Moreover, this study performed a lag between the period of the dependent and
independent variables, assuming that ESG performance and corporate reputation in the
previous year are information used by investors to assess investment opportunities this
year. In addition, it was done to avoid and overcome the endogeneity problem or reverse
causality between these variables so that it is not possible if the influence of foreign
investment in period t affects ESG performance in the previous period (t-1). The equations
used in this study are as follows:

𝐹𝐼𝑖,𝑡 = 𝛼0 + 𝛽1 𝐸𝑆𝐺𝑖,𝑡−1 + 𝛽2 𝑇𝑜𝑏𝑖𝑛𝑠 ′ 𝑠𝑄𝑖,𝑡−1 + 𝛽3 𝑆𝑖𝑧𝑒𝑖,𝑡−1 + 𝛽4 𝐴𝑔𝑒𝑖,𝑡−1 +

𝛽5 𝐵𝑜𝑎𝑟𝑑𝑖,𝑡−1 + 𝛽6 𝐼𝑁𝐷𝑃𝑖,𝑡−1 + 𝜀 ……………………… (1)

𝑅𝑒𝑝𝑢𝑡𝑎𝑡𝑖𝑜𝑛𝑖,𝑡−1 = 𝛼0 + 𝛽1 𝐸𝑆𝐺𝑖,𝑡−1 + 𝛽2 𝑇𝑜𝑏𝑖𝑛𝑠 ′ 𝑠𝑄𝑖,𝑡−1 + 𝛽3 𝑆𝑖𝑧𝑒𝑖,𝑡−1 + 𝛽4 𝐴𝑔𝑒𝑖,𝑡−1 +

𝛽5 𝐵𝑜𝑎𝑟𝑑𝑖,𝑡−1 + 𝛽6 𝐼𝑁𝐷𝑃𝑖,𝑡−1 + 𝜀 ………………………… (2)

𝐹𝐼 = 𝛼0 + 𝛽1 𝐸𝑆𝐺𝑖,𝑡−1 + 𝛽2 𝑅𝑒𝑝𝑢𝑡𝑎𝑡𝑖𝑜𝑛𝑖,𝑡−1 + 𝛽3 𝑇𝑜𝑏𝑖𝑛′𝑠𝑄𝑖,𝑡−1 + 𝛽4 𝑆𝐼𝑧𝑒𝑖,𝑡−1 +

𝛽5 𝐴𝑔𝑒𝑖,𝑡−1 + 𝛽6 𝐵𝑜𝑎𝑟𝑑𝑖,𝑡−1 + 𝛽7 𝐼𝑁𝐷𝑃𝑖,𝑡−1 + 𝜀 …… (3)

This study also used factors attracting foreign investment. In the equation model above,
IAi,t is the level of foreign investment in company i in period t; LST(t-1) is environmental,
social, and governance (LST) performance in company i in period t-1; Reputationi,t-1 is the
reputation of the company i in period t-1.

For empirical analysis, this study utilized various control variables: Tobin's Q (market
performance), firm size, firm age, board size, and percentage of independent boards.
Tobin's Q was employed to control the preferences of foreign investors regarding
company growth. Tobin's Qi,t-1 is defined as the market performance of firm i in period t-

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1. This study also controlled this effect using UPi,t-1, defined as firm size i period t-1.
Previous studies have observed that large companies are followed by analysts more,
resulting in lower information asymmetry (Chauhan and Kumar 2019). In addition, the
firm's age, Agei,t-1, is defined as the age of firm i in the period t-1. In addition, this study
included several governance variables to control corporate-level governance practices.
Boardi,t-1 is the board size of firm i in period t-1, and INDPi,t-1 is defined as the percentage
of independent boards of firm i in period t-1.

Then, to investigate how environmental, social, and governance (ESG) performance

affected foreign investment through corporate reputation, this study follows Baron and
Kenny (1986). They argued that the variable functions as a mediator if it fulfills three vital
conditions: first, the independent variable (ESG performance) should significantly affect
the dependent variable (foreign investment). Second, the independent variables (ESG
performance) should substantially influence the mediator variable (corporate
reputation). Third, when the independent variables and mediator are included in the
model, the mediator variable value should be significant, but the independent variable
value (ESG performance) should be reduced.

Result and Discussion

Descriptive Statistic

Table 2 reports the descriptive statistic results to see the distribution of research data in
the 2014-2019 period. The foreign investment variable (IA) had a mean value of 5.6675,
with a standard deviation of 8.2392. It demonstrates that the mean level of company
investment in Indonesia in 2015-2019 was IDR 5,667,470,000, and the value varied greatly
from company to company.

Table 2 Descriptive Statistic

Mean Maximum Minimum Std. Dev. N
IA 5.6675 34.1468 0.0578 8.2392 150
ESG 44.1212 84.9661 7.7269 20.3959 150
Reputation 2.8871 24.4027 -0.3238 3.5470 150
Tobin’s Q 1.9426 9.7012 0.5141 1.3060 150
Size 29.3350 33.0950 17.0021 4.6589 150
Age 3.4618 4.4427 1.6094 0.5333 150
Board 1.8695 2.6391 1.0986 0.4554 150
INDP 0.4165 1.0000 0.1429 1.5956 150

Meanwhile, the lowest value was 0.0578, which was the value of foreign investment from
PT Astra Agro Lestari Tbk (AALI) in 2015, and the highest value was owned by PT Unilever
Indonesia Tbk (UNVR), which was 34.1468 or IDR 34,146,788,060.

In addition, the ESG variable had a mean value of 44.1212, with a standard deviation of
20.3959. It indicates that the performance of corporate responsibility on environmental,
social, and governance factors in Indonesia in 2014-2018 was 44.1212, and the value
differed from company to company. These results signify that, on average, non-financial

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companies in Indonesia were not enthusiastic about implementing ESG in the company's
operational activities. Then, the lowest score was 7.7269, i.e., the ESG performance of PT
Gudang Garam Tbk (GGRM) in 2014, and the highest score was owned by PT Vale
Indonesia Tbk (INCO) in 2014, which was 84.9661. Meanwhile, the reputation variable had
a mean value of 2.8871, with a standard deviation of 3.5470. It denotes that the mean
market-to-book value ratio of companies in Indonesia in 2014-2018 was 2.8871, and the
value varied from company to company. It demonstrates that, on average, Indonesian
companies were valued higher in the market than they should be.

Regression Results

Table 3 presents the first equation test results. In this study, environmental, social, and
governance (ESG) performance had a regression coefficient of 0.108467, indicating the
positive direction of the regression coefficient. The probability value was 0.0004 at the
significance level = 5%, and then the probability value was significant as it was less than
0.05.

Table 3 First Equation Test Results

2SLS
Variable Direction Prediction
(β) Prob.
Constant ? -20.79383 0.0015
ESG + 0.108467 0.0004
Tobin’s Q + 0.839356 0.0614
Size + -0.173258 0.1861
Age + 2.615148 0.0320
Board + 3.713268 0.0055
INDP + 0.219286 0.0000
Adj. 𝑹𝟐 0.299419 -
Standard Error 6.896252

Table 4 Second Equation Test Results

2SLS
Variable Direction Prediction
(β) Prob.
Constant ? -3.156554 0.1349
ESG + 0.003105 0.7521
Tobin’s Q + 2.091230 0.0000
Size + 0.030496 0.4751
Age + 0.376850 0.3410
Board + -0.216355 0.6155
INDP + 0.001186 0.9224
Adj. 𝑹𝟐 0.596978 -
Standard 2.251801 -
Error

It can be concluded that the data from hypothesis 1 test results were supported, meaning
that the environmental, social, and governance (ESG) performance positively affected the
foreign investment level. In other words, the better the environmental, social, and
governance (ESG) performance of a company, the higher the level of foreign investment

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entering the company. It proves that the ESG performance of a company is a factor
considered in investment decisions by global investors. In this case, companies with good
ESG performance are potential investment fields. They provide sustainable, more
profitable, and low-risk investments since they can reduce information asymmetry
problems and improve future financial performance.

As presented in Table 4, ESG performance on the corporate reputation had a regression

coefficient of 0.003105, suggesting the positive direction of the regression coefficient. The
probability value was 0.7521 at a significance level of = 5%, and the probability value was
insignificant because it was more than 0.05. Therefore, it can be concluded that the data
from the hypothesis 2 test were rejected, indicating that the environmental, social, and
governance (ESG) performance did not affect the corporate reputation.

This study's results align with Andayani (2021) and Axjonow et al. (2016), which have
proven no significant relationship between ESG implementation and corporate
reputation. However, the results of this study are not in line with the research of Pham
and Tran (2020), Reber et al. (2021), and Siegel (2009), which verified that the ESG
performance of a company had a positive effect on the corporate reputation. It happened
because of no reporting standards and guidelines for ESG activities carried out by
companies in the Indonesian capital market. It is one of the obstacles for companies in
Indonesia to be able to make ESG practices a good impression management strategy. The
existence of regulated disclosure guidelines and standards can also be a strategy to
improve and optimize the implementation and publication of ESG practices in Indonesian
companies. According to signal theory, ESG disclosure and reporting can be a
communication tool that can represent companies by reporting their efforts in carrying
out good management practices and being socially and environmentally responsible
(Reber et al., 2021). Also, the lack of regulation on good and structured disclosure makes
the ESG implementation is not well identified by stakeholders (Bhattacharya & Sen, 2004).
As a result, several companies that have improved their ESG performance have not been
able to build a good reputation and impression through the improvement of their ESG
performance.

Table 5 Third Equation Test Results

2SLS
Variable Direction Prediction
(β) Prob.
Constant ? -18.87816 0.0036
ESG + 0.106583 0.0004
Reputation + 0.606884 0.0173
Tobin’s Q + -0.429779 0.5314
Size + -0.191766 0.1378
Age + 2.386443 0.0472
Board + 3.844571 0.0035
INDP + 0.218566 0.0000
Adj. 𝑹𝟐 0.322190 -
Standard Error 6.783252 -

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Table 5 shows the third equation test results. Concerning the level of foreign investment,
the corporate reputation had a regression coefficient of 0.606884, demonstrating the
direction of the positive regression coefficient. The probability value was 0.0173 at the
significance level = 5%, and the probability value was significant since it was less than 0.05.
Hence, it can be concluded that the data from hypothesis 3 test results were supported,
meaning that the corporate reputation positively affected the level of foreign investment.
The better a corporate reputation, the higher the company's foreign investment level.

Then, to answer hypothesis 4, this study bases the conclusions on Baron, based on several
criteria for mediating variables described above. Data from hypothesis 4 test results were
not supported since the second condition (independent variable should significantly
influence the mediator variable) was not met. It indicates that the corporate reputation
variable could not mediate the relationship between ESG performance on foreign
investment or that the influence of ESG performance on foreign investment was not
through corporate reputation.

This study's results corroborate Andayani (2021) and Axjonow et al. (2016). In this case,
the good ESG performance of a company has not been able to build a good reputation for
the company. It could happen because of the need for efforts to deliver and communicate
related to the implementation of ESG practices by the company so that various
stakeholders can easily identify it. This argument agrees with signal theory, explaining that
massive disclosure and reporting are needed to convey positive value activities conducted
by companies, such as implementing ESG practices. To be aware of companies'
involvement in ESG practices, companies must also communicate with the public about
their ESG activities (Deephouse et al., 2016). Without communication, no matter how
many ESG activities a company develops, the positive impact of ESG activities on public
perception will be negligible. Thus, ESG performance will not be able to become a reliable
impression management strategy in attracting foreign investment without reporting and
disclosure efforts.

On the other hand, reporting on ESG activities in Indonesia is still limited to mandatory
disclosure and has not been carried out voluntarily. In addition, the absence of structured,
standard guidelines regarding the disclosure of ESG activities in the Indonesian capital
market has made companies unable to make more massive disclosures. Consequently,
foreign investors could not properly identify the positive signals that result from the ESG
implementation. Table 6 shows the summary of research results.

Table 6 Summary of Research Results

Hypothesis Result
H1 Companies with better ESG performance tend to have higher Supported
foreign investment than companies with worse ESG performance.
H2 Companies with better ESG performance tend to have a better Not Supported
corporate reputation than companies with worse ESG performance.
H3 Companies with better reputations tend to have higher foreign Supported
investment than companies with poorer reputations.
H4 ESG performance affects foreign investment through corporate Not Supported
reputation.

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Additional Analysis

Additional analysis in this study was conducted to see how each industry group paid
attention to ESG practices, which are one of the most interesting operational activities in
the capital market. Then, the grouping of industries in this research was based on the
Indonesia Stock Exchange JASICA (Jakarta Stock Industrial Classification).

Table 7 Industry Group Descriptive Statistics

Industry Min Max Mean Std. Deviation
Agriculture 24.1513 33.6514 29.7105 4.324476
Mining 21.9018 84.9661 62.9170 18.5198
Basic Industry and Chemicals 8.2209 59.2042 36.7520 18.87384
Miscellaneous Industry 32.2470 37.4935 35.0057 1.888768
Consumer Good Industry 7.7269 74.0361 38.8775 21.65648
Property, Real Estate, dan Building 23.4252 44.6971 31.5925 6.783773
Construction
Infrastructure, Utilities, and Transportation 15.9246 73.1576 51.8636 17.54613
Trade, Service, and Investment 11.7616 62.3200 34.1630 15.73921

From Table 7, the descriptive statistical results showed that the mining industry had a
much better ESG performance than other industrial groups, with a mean ESG score of
62.9170. Then, it was followed by the infrastructure, utility, and transportation industry
groups, with an ESG score of 51.8636. It might be because the mining industry is influential
on the three ESG factors (environmental, social, and governance), so it is vulnerable to
legitimacy risks. To cover the negative issues inherent in the company, ESG practices are
expected to balance the spread of the problems in mining companies so that they can be
more accepted by the public and reduce legitimacy problems. Meanwhile, the agricultural
industry group owned the lowest mean ESG practice performance, scoring 29.7105. In
this regard, the agricultural industry group did not focus much on the performance of its
ESG practices because of the low legitimacy risk faced by companies in the agricultural
industry group. Thus, it appears that the company's management is aware of the risk level
faced by each industry group to activate and adjust the ESG practices applied to compete
with its competitors.

Conclusion
This study investigated whether ESG performance positively influenced foreign
investment and whether reputation could explain the relationship. The data were
collected from the Thomson Reuters database. Then, 2SLS regression was carried out on
all non-financial companies in the Indonesia Stock Market for the 2015-2019 period. The
regression results revealed that ESG performance in companies in Indonesia has not been
able to become an impression management strategy in the public assessment of a
company. It might be due to the lack of role in disclosing ESG information by companies
in Indonesia. Research in Indonesia also documented that the disclosure and reporting of
sustainable practices in Indonesia have not been widely exposed, so the information on
ESG practices has not been conveyed optimally. Moreover, Indonesia has various negative

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environmental, social, and governance issues. It causes the level of foreign investment in
Indonesia to be weak compared to other ASEAN countries. Therefore, Indonesian
companies must implement impression management through sustainable activities and
reporting to reduce these negative issues and gain investor confidence to invest in
companies in Indonesia.

However, ESG performance could still positively influence the investment decisions of
global investors because it reflects the company's commitment to implementing ethical
and sustainable business practices and paying attention to environmental, social, and
governance factors relevant to the demands and concerns of global stakeholders today.
The findings also uncovered that a good corporate reputation could increase the entry of
foreign investment into a company since it indicates a company's competitive advantage
in various financial and non-financial dimensions. In the future, companies in Indonesia
can intensify good impression management strategies to form a good perspective from
the public through optimally disclosing information on company activities with positive
values.

Furthermore, this study was limited to a small research sample due to the limited
availability of ESG data on the database. This study only used 30 companies listed on the
Indonesian Stock Exchange as a sample. Thus, future research can broadly identify sample
data to obtain more diverse and comprehensive results in other populations. Still, this
research has implications for standard setters to pay attention to policies related to
environmental, social, and governance responsibility activities and carry out the process
of developing structured guidelines related to the disclosure of environmental, social, and
governance responsibility practices. In addition, Indonesia's level of foreign investment is
still relatively low compared to other ASEAN countries. Therefore, the existence of
structured guidelines on ESG activities is expected to encourage the company's ESG
performance, which is proven to increase foreign investment. Besides, this research has
implications for investors to carefully assess investment opportunities based on the
company's sustainability report. Investors should also properly evaluate a company's ESG
activities and performance because ESG performance is a positive signal indicating that
the company is committed to implementing ethical and responsible business practices.

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