The Moderating Green Innovation in the Relationship between ESG and Corporate Profitability

Abstract

Environmental, Social, and Governance practices have emerged as critical determinants of corporate sustainability, yet their relationship with financial performance remains contested in emerging markets. This study examines how green innovation moderates the association between ESG implementation and corporate profitability among Indonesian publicly listed companies. Utilizing panel data from 127 firms across multiple sectors during 2019-2023, we employ moderated regression analysis to test hypotheses. Results reveal that ESG practices demonstrate a significant positive influence on return on assets, with green innovation serving as a strengthening moderator in this relationship. Specifically, firms combining robust ESG frameworks with systematic green innovation investments achieve profitability premiums averaging 3.8 percentage points higher than peers with limited innovation capacity. These findings contribute to stakeholder theory and resource-based view perspectives by demonstrating that environmental innovation capabilities transform sustainability commitments into tangible financial advantages. The study offers strategic guidance for corporate leaders seeking to optimize sustainability investments and provides policymakers with evidence supporting incentive structures that encourage simultaneous ESG adoption and green technological advancement.