ESG, Green Innovation, and Digital Transformation: Effects on Performance in the Islamic Capital Market

Abstract

Purpose: This study analyzes the influence of Environmental, Social, and Governance (ESG), green innovation, digital transformation, and macroeconomic factors (inflation, exchange rates, and interest rates) on financial performance, firm value, and investment decisions of companies listed in the Jakarta Islamic Index (JII).Design/Methodology: The study uses a quantitative approach with Partial Least Squares Structural Equation Modeling (PLS-SEM) in SmartPLS 4 and secondary data from annual and sustainability reports of 16 JII-listed companies, producing 64 firm-year observations for 2021–2024.Findings: The results of the study indicate that ESG has a positive and significant effect on financial performance (ROE), while financial performance has a significant negative effect on investment decisions (PER). The indirect effect of ESG on investment decisions through financial performance is insignificant, and ESG also has no effect on firm value (Tobin's Q). Macroeconomic factors, green innovation, and digital transformation have not shown a significant role.Practical Implications: The findings indicate that ESG disclosure is associated with stronger accounting-based financial performance, but the observed relationship does not extend significantly to firm value or PER in the sample. The results should not be interpreted as direct evidence of investor attitudes because investor perceptions were not measured. From an Islamic finance perspective, the findings can be discussed in relation to transparency, accountability, and value preservation, while any link to maqasid al-shariah remains interpretive rather than empirically tested.Originality/Value: This study integrates ESG with green innovation and digital transformation as potential moderating mechanisms and examines these relationships alongside selected macroeconomic variables in companies listed in the Jakarta Islamic Index. The study contributes evidence on whether ESG effects are more apparent in accounting-based performance than in market-based outcomes within an Indonesian Sharia capital-market setting.