Do Sustainability Activities Affect the Financial Performance of Banks? The Case of Indonesian Banks

Round 1

Reviewer 1 Report (Previous Reviewer 1)

The revised version looks enhanced and all comments were addressed. Well done 

 

Reviewer 2 Report (Previous Reviewer 2)

The manuscript can be accepted for publication.

Reviewer 3 Report (Previous Reviewer 3)

All comments already filled

Good

This manuscript is a resubmission of an earlier submission. The following is a list of the peer review reports and author responses from that submission.

Round 1

Reviewer 1 Report

Please see attached file 

 

Comments for author File: Comments.pdf

Author Response

• Thank you very much for reading our article, for your time and for your recommendations.

Regarding your review recommendations:

• - The abstract has been fully reviewed. The purpose of the research, the methodology adopted, the findings found, and the limitations and implications of the study have been briefly indicated. It has been perfectly adapted according to the guide of the magazine.

The introduction. In the first 3 paragraphs I found that there are no citations at all, even though there are statements where citations are highly required to be supported. For instance, “Disclosure of prudential information on environmental, social, and governance (ESG) risks is increasingly important in large institutions that trade securities on a regulated market in different regions” Who says so? Thus, citations are highly recommended. And I would suggest reading the following papers.

• Thank you for recommending the three jobs that are of interest. Now in that paragraph two references have been included.

Based on the statement on line 60 indicated “In Indonesia, sustainability reporting (ESG) has been regulated since 2017 by Financial Services Authority Regulation No. 51/POJK.03/2017” Since 2017 is the official implementation year for ESG in Indonesia why the dataset included data from 2010? Appropriate justification is needed.

• Thanks for the observation. Now it has been justified why an analysis period of 10 years has been chosen. We analyze the relationship between ESG and PF using Thomson Reuters ESG data for 2010-2020. This time allows us to get ESG information before and after the 2017 Indonesian ESG regulation and how financial institutions have been preparing to disclose this type of non-financial information.

Based on the statement on line 80, Indonesia is a major nation in Southeast Asia in promoting 81 sustainable finance and sustainability reports to build trust, providing added value……etc, what about Singapore? I think Singapore is the leading hub of the financial sector in Asia compared with other countries in the area. I would suggest a comparative study in this case or indicate that as one of your paper’s limitations.

• It is a very accurate observation. This first research seeks to get a snapshot of the relationship between ESG disclosure and the financial performance of Indonesian banks. Another work that we are finishing deals with the comparison between the different countries of Southeast Asia. It has now been stated as a limitation of this study.

The research questions are inappropriately formulated; for example, RQ1 How prepared are Indonesian financial institutions to report on ESG after the 2017 regulation? This is not linked directly to the main aim of the study, thus, we require re-writing all RQs.

• Thanks for the observation. As indicated and now clarified in the introduction, a study period of the years before and after the approval of the regulations and the obligation of companies to report on ESG has been chosen. This makes it possible to find out over the course of these periods how companies have prepared themselves to be able to comply with the regulations and disclose this information.The results of the descriptive statistics have allowed us to answer the first three research questions that have been asked and to map the level of ESG information and the level of financial performance of Indonesian banks.

The hypotheses should be moved to the literature review section. However, I can’t see the association between RQs and hypothesis developments. They are not professionally liked. Please consider re-writing them.

• To deepen the exploratory study and the results of the descriptive statistics, the fourth research question was formulated (RQ4: What statistical connections and associations exist between ESG and PF in banking companies in Indonesia?). From it, the three research hypotheses have been formulated. We analyze what statistical connections and associations exist between ESG and PF in Indonesian banking companies to answer research question QR4 and test the hypotheses using panel data techniques and the EViews statistical tool. And for the contrast of the hypotheses, statistical correlations and regression models have been carried out.

Research Methodology: lines 265 to 267 should be deleted. In addition, a justification of the period (2010-20).

• We believe that these lines help to introduce and summarize the method followed in the investigation.

In addition, a justification of the period (2010-20) investigated should be provided as discussed earlier. With regards to the dataset (47 banks), does it include Islamic banks? If not, why? And If you did consider the Islamic banks, why nothing has been discussed in this regard in the literature review?

• The choice of this period has been justified. In section 3.1. ESG data sources, the entire process followed for the selection of the sample of banks has been justified.

In terms of observation, do you think 55 observations is fair enough? And whether the outcome of this can be generalized

• Unfortunately, the information that is disclosed is still scarce. For this reason, it has been pointed out as a limitation.

Study variables, mainly the control variables, the author(s) have selected ONLY two firm characteristics as control variables. Why? And what about liquidity and external stockholders, managerial stockholders, growth of the banks, credit risk, capital adequacy ratio… etc.

• Effectively, other and different ratios could have been chosen as control variables. However, we have based ourselves on previous studies for the choice and thus the choice of control variables for this study has been justified. Thank you for your recommendation and we will take it into account for the next study.
• This study uses two control variables to examine the relationship between sustainability reports and FP: size and leverage. Size is measured using the natural loga-rithm of total assets by Refs. [33], [46], [72], [35]. Leverage, measured by calculating total debt, has been used in previous studies by Refs. [25], [33], [46]. Leverage represents the risk the bank owns; the greater the bank's debt, the more debt impacts the amount of the bank's funds available for CSR activities. With the results of these variables, it is possible to answer the research question RQ3.

Results and discussion: Although the author(s) has fairly presented the result, however, this outcome should be compared with other published work in the same field. Consequently, we would suggest to critically comparing it with prior studies and justifying your outcomes if it varies from others.

• Thanks for the suggestion. In section 4.2. Empirical results are presented and have been critically compared with the results of previous research.

The paper is fairly written, however, it could benefit from a proofread before resubmission.

• The manuscript has been fully reviewed by a native English language reviewer.

Reviewer 2 Report

The manuscript is very interesting. However, there are some improvements required like:

1) The novelty of the paper must be clearly stated in the introduction page.

2) Some robustness  check must be done to support the findings of the manuscript.

3) There must be a discussion section after explaining the regression results.

4) Practical, theoretical and policy implication must be provided in a separate section before conclusion.

All the best...

Comments for author File: Comments.pdf

Author Response

The main question addressed by the research is the impact of ESG on financial performance of Indonesian banks. But the author needs to explain the novelty of the paper in the introduction page very clearly.

• Thank you very much for taking the time to read the manuscript and for your suggestions. The abstract has been fully reviewed and the novelty of the research has also been detailed in the introduction.
• “A pioneer in understanding progress on these sustainability issues in Indonesia, our study attempts to evaluate Indonesian financial institutions’ awareness of the reality of ESG risks and their economic effects by analyzing the relationship between ESG and FP in banking companies. Therefore, this study aims to analyze the relationship between sustainability and financial performance in Indonesian banks that have been little studied so far and thereby fill an important research gap in sustainability for emerging economies”.

The topic is relevant in the field, and it addresses the research gap. The paper not only investigated the overall impact of ESG on FP but it also examined the impact of the components of ESG on financial performance. The conclusions are consistent with the evidence and arguments and address the proposed question. Regarding the methodology, some robustness check must be done to support the findings of the manuscript.

• Thanks for your consideration. First, the Jarque-Bera test is a goodness-of-fit test to check if a data sample has the skewness and kurtosis of a normal distribution. Robustness tests such as the HAUSMAN TEST have been carried out. These tests that we carry out allow us to decide the choice of the model between fixed and random effects, but these models are not effective when it comes to capturing or modeling the presence of Autocorrelation and heteroscedasticity. , for which we will use formal tests to identify what kind of problems are present in our model, mainly because there are several ways to model and capture the effects in panel data.

Apart from the above comments, I would also like to give few suggestions that will improve the work further: 1) There must be a discussion section after explaining the regression results. 2) Practical, theoretical and policy implications must be provided in a separate section before conclusion. 3) The English language must be improved before publication.

• Thanks for the suggestions. In this case we have preferred to present a section 4. Results and discussion. This makes it easier for the reader to compare the results obtained with those of previous investigations. As is known, this option is also very common in research and publications in top-level journals. The practical, theoretical, and political implications have been presented in section 5. Conclusions, implications, limitations of the research.
• The manuscript has been fully reviewed by a native English language reviewer.

Reviewer 3 Report

I cant see the research gap and novelty in section 1

the structure and flow is not good

data validation will be questionnable

the table and result not use the standard research in accounting and finance

discussion is limited and too short for research in reputable journals

conclusion so general and not specific from the empirical result

Author Response

• Thank you for your time and for reading the manuscript. Regarding the research gap, it has been detailed in section 1. "This study analyzes how ESG affects FP in large Indonesian banks. We chose to examine these banks due to their significant contribution to expansion of the Indone-sian and Southeast Asian economies Indonesia is a major nation in Southeast Asia in promoting sustainable finance and sustainability reports to build trust, provide added value, and outline these entities' corporate strategy. A pioneer in understanding progress on these sustainability issues in Indonesia, our study attempts to evaluate Indonesian financial institutions' awareness of the reality of ESG risks and their economic effects by analyzing the relationship between ESG and FP in banking companies. Therefore, this study aims to analyze the relationship between sustainability and financial performance in Indonesian banks that have been little studied so far and therefore fill an important research gap in sustainability for emerging economies.
• Section 2. Literature review and theoretical background shows the importance of this type of research in ​​accounting and finance at the present time worldwide. The research methodology that has been followed in this work is followed by the scientific method and is supported by many previous works published in top-level journals. This scientific approach that has been followed also supports our results. However, they are not exempt from the limitations that are detailed in the final cut together with the conclusions.

Reviewer 4 Report

It would be useful to add pictures, graphs from the data

Author Response

• Thank you very much for reviewing our work, for your time, and for your consideration. We have reviewed some aspects of the research methodology and clarified issues raised by another reviewer regarding the research period, the research gap, and robust evidence of results.