Green Loan, Sustainability-Linked Loan, and Profitability of Conventional Banks in Indonesia

Abstract

This study aims to examine the association between green loans, Sustainability-Linked Loans (SLL), and the profitability (measured by Return on Assets) of conventional commercial banks in Indonesia. Using a balanced panel of eight banks from 2021 to 2025, the research employed a Fixed Effect Model to analyze data from audited financial and sustainability reports, measuring sustainable loan exposure as a percentage of total assets while controlling for bank size and capital adequacy. The results reveal that neither green loans nor SLLs significantly impact profitability once bank fixed effects are controlled. While an initial negative association between SLLs and profitability appeared during pooled estimation, further analysis demonstrated this was merely a bank-size artifact: smaller, inherently less profitable banks simply held proportionally larger sustainable-lending portfolios. Ultimately, bank size and capital adequacy were the actual drivers of profitability, and mechanism tests found no evidence that SLLs reduce credit risk. Methodologically and theoretically, this study provides the first scale-adjusted measurement of SLL exposure in Indonesian banking and issues a strong caution: studies reporting significant profitability effects from sustainable lending without adequate size controls may simply be measuring bank scale rather than the true impact of the financial instruments.