Sustainable Value Chain for Sustainable Lending of State-Owned Banks in Indonesia

Abstract

Banks have enormous potential to support the achievement of sustainable development goals (SDGs) in accordance with their function as financial intermediaries through sustainable lending. However, the average national financing growth for the sustainable business activity category over the past four years is still 12%. The aim of this research is to identify the conditions of sustainable lending at state-owned conventional banks and analyze the influence of the value chain, economic performance, and ESG performance on sustainable lending. The research was conducted at state-owned commercial banks in Indonesia. The research utilized structural equation modeling (SEM). The SEM results of this study describe value chain, ESG performance (environmental, social, and governance), and economic performance and have direct and positive influences on sustainable lending, of which ESG performance has the biggest influence. As per each individual aspect, social orientation makes the biggest contribution toward sustainable lending.

1. Introduction

Banks have great potential to support the achievement of sustainable development goals (SDGs) in accordance with their function as financial intermediaries through sustainable lending. In recent years, the Indonesia Financial Services Authority (OJK) has issued regulations regarding the implementation of sustainable finance and the implementation of governance for commercial banks, which also includes lending activities. Increased business awareness of environmental and social aspects is a driver of sustainable lending and, at the same time, a source of funds with incentives and a more comfortable investment. However, the average national financing growth for the sustainable business activity category over the last four years (2019–2022) is still 12% [1], which is below the growth of 40 other countries by 30% [2]. Stakeholder expectations for sustainable lending are a challenge for banks, especially in the face of various developments in the external environment. both at the macroeconomic level and at the industry level, including regulatory developments and the potential for greenwashing.

To meet stakeholder expectations and respond to the dynamics of the external environment, state-owned conventional banks, which hold 44.6% of the national loan portfolio, require certain business models and strategies to further drive sustainable loan growth. One approach that can be used is through the value chain concept, which is the basis for developing a business model [3] and, at the same time, a material for strategic planning [4]. The value chain approach is very relevant to lending activities where there are primary and supporting activities linked to generate margins (financial performance). Given that the output of the generic value chain is just financial performance, it is necessary to adopt the environmental, social, and governance (ESG) concept toward a sustainable value chain. Sustainable value chains improve the capabilities of companies, which cannot be adequately addressed by traditional value chains [5].

The value chain in lending consists of the primary activities that constitute a series of credit processes, from customer data collection, credit analysis and decisions, and administration to credit monitoring [6]. In addition, there are support activities, which are the internal resources of the bank, consisting of human resources, risk management, information technology, and bank infrastructure [7,8]. Meanwhile, output, which was originally margin, was transformed into economic performance, non-financial performance, or ESG performance.

There are various research results regarding the effect of ESG performance on financial performance, economic performance, and sustainable lending. Research on companies in the USA [9] and companies in Malaysia and Singapore [10] shows a strong relationship between ESG performance and economic performance. Individually, ESG performance is also related to financial performance, where the governance aspect has a very strong influence compared to other aspects [11]. Research in the countries of Brazil, Russia, India, China, and South Africa (BRICS) revealed that, although there was a significant positive relationship between the total ESG score and financial performance, the individual environmental, social, and governance scores were not significant [12]. This condition has the implication that ESG elements have a combined influence on financial performance. Differences in research locations can influence different research results; this is influenced by regional regulations and awareness of the banking industry in each country.

There are many elements of the value chain that play a role, and the lack of a unified opinion regarding the influence of ESG performance is the problem formulation in this research. Based on these backgrounds and problems, this research aims to identify the conditions of sustainable lending in state-owned conventional banks in Indonesia and analyze the influence of the value chain, economic performance, and ESG performance on sustainable lending.

2. Literature Review and Hypothesis Development

2.1. Literature Review

2.1.1. Stakeholder Theory, Triple Bottom Line, and ESG

The sustainable business approach is based on the stakeholder theory developed by Freeman [13]. This theory states that the success of a company depends on fulfilling the interests of all stakeholders, where the current context includes not only economic interests but also social and environmental ones. Stakeholder theory is used to explain the relationship between the implementation of the ESG concept and economic performance. Referring to stakeholder theory in research related to the influence of ESG practices on economic performance, it is explained that ESG performance management is responsible for creating business enthusiasm and an environment that builds company integrity in society and stakeholder trust [10]. Research regarding ongoing performance evaluation in banks is carried out through an approach to stakeholders, consisting of customers, regulators, shareholders, the community, managers, and employees [14].

There are three dimensions related to the concept of business sustainability, namely the economic, social, and environmental dimensions [15], which are the triple bottom line, or TBL, concept [16]. The economic dimension is related to the company’s capability to generate profits; the social dimension is related to the company’s contribution to social aspects such as the welfare of the community around the company; and the environmental dimension is related to the company’s involvement in preserving the environment by using resources that can be renewed or recycled. Following up on the concept of TBL, there are several ideas regarding environmental, social, and governance, commonly referred to as ESG. The term ESG was first introduced by the United Nations in the article “Who Cares Wins”, which explains whether a product has a positive contribution to the environment, social, and governance of the organization [17]. In this concept, in addition to social and environmental aspects as in the TBL concept, there are governance aspects, which are an inseparable series. Governance aspects play an important role in value creation by ensuring accountability, compliance, and transparency [18].

The ESG concept refers to a material dimension that is outside the financial division that is a challenge for companies to achieve optimal company performance [19]. ESG aspects can be described individually through their respective indicators. Indicators commonly used as elements of environmental aspects are energy conversion efficiency, biodiversity and land use, waste and toxic emissions, and clean technology, while for the social aspect, elements of treatment to stakeholders, product safety, privacy, and data security [20,21,22]. Currently, there is a lot of research regarding the influence of ESG performance elements that contribute positively, negatively, or have no effect based on existing articles. The positive influence can be seen in the article by Menicucci and Paolucci [21], which states that reducing emissions and waste (environmental aspects) has a positive and significant impact on financial and operational performance. Research by Gutiérrez-Ponce and Wibowo [23] states the opposite: that the environmental pillar does not have a significant impact on financial performance. The two studies were carried out in different countries; Menicucci and Paolucucci’s [21] research was carried out in Italian banks; Gutiérrez-Ponce and Wibowo’s [23] research was carried out in Indonesian banks. Different research locations can influence research results due to regional regulations and awareness of the banking industry in each country. Other studies on ESG pillars indicate that they enhance the participation of banking institutions in sustainable finance, as noted by Pyka and Nocon [24]. However, Gutiérrez-Ponce and Wibowo [23] found that the ESG pillars in banking are negatively correlated with financial performance. The research by Gutiérrez-Ponce and Wibowo [23] and Pyka and Nocon [24] presents divergent conclusions on bank ESG reports and their association with ESG risks in Poland, highlighting that ESG performance results differ by location and ESG dimensions.

2.1.2. Value Chain Concept and Resource-Based View

Approach to internal resources in lending using the value chain concept [25], which presents systematically the economic activities of a company and its interactions to develop competitive advantage. The primary activities in the value chain concept are activities that are directly related to product creation, sales, distribution, maintenance, and service activities [25]. Supporting activities are activities that support operational activities in a company as a whole, consisting of procurement, technology development, human resource management, and company infrastructure [25]. This concept was originally developed for industrial activities in general, but can be adopted into other business activities such as banking [7]. With regard to this, the application of lending activities needs to be adjusted by referring to some of the relevant literature. The process of providing credit consists of several activities, namely loan origination, credit analysis, credit approval, credit documentation, loan disbursement and credit administration, and handling non-performing loans [26,27,28]. Scannella [6] and Hubbard et al. [29] used a value chain framework to develop a loan origination scheme consisting of several stages of the credit process, namely customer application, data collection process, credit analysis, and decision-making, which are the primary activities.

In research on competencies in commercial banks [7], smart sourcing in the banking environment [8], and digital transformation of bank services [30], they each use the value chain concept to determine the effect of activity variables on competence, smart sourcing, or in respond to disruption. Indicators of supporting activities are adjusted by including risk management activities as a substitute for procurement activities, in addition to human resources, information technology, and bank infrastructure. This is because the role of risk management in the banking environment is very important in supporting prudent bank activities. Other adjustments to support activities in lending are related to the bank’s function as a financial intermediary. According to the financial intermediation theory of banking, the two main activities of banks, namely fund-raising and lending activities, form an uninterrupted cycle of business activities [31]. The funds raised are liquidity that will be channeled into lending activities in the form of lending products and portfolios. Loan growth and deposits are significant determinants of a bank’s liquidity [32]. On the other hand, money supply is strongly related to credit creation [33]. The application of the value chain concept in banking activities that have been adapted to lending activities includes primary activities and support activities, as presented in Figure 1.

In anticipation of increasing competition and to maintain business continuity, banks choose resources that can be relied upon to be a competitive advantage according to their capabilities in the value chain, both from primary activities and support activities, in accordance with the resource-based view of the firm [34]. The three concepts of resource-based views of the firm are firm resources, competitive advantage, and sustainable competitive advantage [35]. This approach operates by initiating certain activities with a concept that is difficult to imitate so that it becomes a sustainable competitive advantage. The strength of the company’s internal factors is related to its capabilities in managing resources and transforming them to anticipate opportunities and challenges [36]. Capabilities are often developed from functional areas or by a combination of physical resources, human resources, and technological resources at the corporate level [37].

2.1.3. Sustainable Lending

Sustainable lending has been going on for quite some time, but there is no standardized definition that has been agreed upon. Sustainable lending is a lending activity that is consistent with the objectives of sustainable finance, namely financing sustainable, environmentally sound economic activities [38]. Accenture [39] describes sustainable lending as an investment activity that considers social, environmental, and governance aspects that play an important role in decision-making. This definition is in line with the Luxembourg Banker’s Association [40]. According to the statement of sustainable investment, sustainable lending that is oriented toward environmental, social, and governance (ESG) factors needs to be considered as part of the credit process and decision. Helaba [41] describes the sustainable lending framework as the implementation of lending activities that have a positive impact on the environment, are social, and contribute to corporate responsible governance (ESG). Meanwhile, according to Calderon and Chong [42], sustainable lending is a bank’s decision to provide loans only to companies that pay attention to environmental and social aspects of their business activities. Apart from the consideration of ESG aspects, economic aspects also have a significant role in supporting sustainable lending activities. Economic sustainability involves all topics related to intergenerational and intragenerational economic considerations [43]. Economic sustainability refers to activities that support long-term economic growth without negatively impacting the social, environmental, and social culture of the community. In addition, economic sustainability not only includes sustainable financing opportunities but also the reorientation of the financial sector on sustainability issues, especially through sustainable finance projects that are currently in progress [44]. Based on the definitions and the framework above, sustainable lending is a bank activity that supports the provision of credit from an environmental, social, and governance perspective while still achieving economic value.

Value chain analysis is very widely used for financial performance, but there is still relatively little attention given to sustainable performance that takes into account environmental and social factors. Therefore, value chain variants need to be expanded by combining them with the three pillars of sustainability: economic, environmental, and social [45]. The sustainable value chain (SVC) is an extension of the original concept of the value chain developed by Porter [25]. Wu et al. [5] argue the SVC model improves firm capabilities that cannot be adequately addressed by the traditional value chain. Sustainable value chains align and link identified resources over selected generic strategies with environmental management, social responsibility, and economic well-being to ensure sustainable development [46]. Based on the value chain approach combined with the application of the triple bottom line concept and ESG insights to fulfill the interests of stakeholders, a conceptual framework for a sustainable value chain for lending has been developed [47], which is presented in Figure 2.

The Indonesia Financial Services Authority (OJK) is deeply invested in the implementation of sustainable finance, simultaneously supporting the achievement of the sustainable development goals (SDGs). The OJK has taken regulatory steps by issuing provisions on sustainable finance, encompassing lending activities. Nevertheless, the national financing growth for sustainable business activities has not lived up to stakeholders’ expectations over the past four years.

The aforementioned details underscore the importance of researching the relationship between the value chain and ESG performance in sustainable lending. This research is vital to bolster the practice of sustainable lending, which banks in Indonesia are mandated to implement, as per OJK’s POJK No. 51 of 2017 on the Implementation of Sustainable Finance.

2.2. Hypotheses Development

2.2.1. The Relationship between Value Chain and Sustainability Performance

The results of various studies show that an increase in the total credit portfolio will lead to a potential increase in the non-performing loan (NPL) [48,49] and a decrease in financial performance [50]. If credit portfolio management is carried out well, it will encourage increased profitability [51]; otherwise, it will have a negative effect on the bank’s financial performance [52]. Overly aggressive credit provision will actually be the main factor causing the downfall of a bank if this is not in line with efforts to maintain its quality through monitoring [53]. Other support activities, such as human resources associated with the readiness of organizations to adopt innovation in the banking sector [54] and analytics skills [55], will strengthen company performance achievements. In addition, an important factor is digital technology, which significantly supports the bank’s profitability in the long-term [56].

The implementation of green finance policies by commercial banks in Bangladesh toward sustainable growth research results show that private and foreign banks are faster in adopting green banking practices than government-owned banks [57]. This is different from Indonesia, where out of eight banks as first movers in sustainable finance, three state-owned banks are dominant in lending to sustainable business activities [58]. Like economic performance, the credit portfolio also has a relationship with ESG performance, namely the ESG score [59]. This is in line with the research of Huy and Loan [60], which shows that risk management has a positive impact on green credit. The availability of green financial products has a positive effect on green banking performance [61]. In addition to the availability of green products, there are other factors that encourage the distribution of green loans, for example, the promotion of green education [61] and the quality of human resources [58]. Other research also reveals the fact that digital technology transformation can improve efficiency and encourage improved ESG performance [62]. Primary activities, such as credit analysis of ESG, affect the credit rating. This is associated with the creditworthiness evaluation of borrowers, where ESG factors are considered related to cash flow [22].

The concept of the value chain model and its effect on sustainable performance were presented by Gelhard and von Delft’s [63]. The value chain enables companies to deliver sustainable products and services in a timely manner, address changing customer needs, shorten lead times, and reduce inventory costs. The results of the study revealed strategic flexibility and value chain flexibility as distinct yet interrelated capabilities in the pursuit of superior sustainability performance. An important part of the lending value chain related to sustainability is liquidity, in which funding liquidity has a positive effect on sustainable bank lending [38]. Several organizations in the financial sector have established various principles as benchmarks for sustainability measurement. The Global Alliance for Banking on Values [64] defined six principles of value-based banking, while the Indonesian Financial Services Authority (OJK) [65] defined eight principles of sustainable finance. According to the two organizations’ principles, the triple bottom line, transparency, responsible investment, and inclusiveness, are directly relevant to sustainable lending. However, there has been no research that combines the value chain concept with the principles of sustainable finance published by the GABV and OJK.

Based on the value chain review previously explained, the following hypothesis is formulated:

Hypothesis 1 (H1). 

Value chain in commercial lending has a positive and significant effect on economic performance.

Hypothesis 2 (H2). 

Value chain in commercial lending has a positive and significant effect on ESG performance.

Hypothesis 3 (H3). 

Value chain has a positive and significant effect on sustainable lending.

2.2.2. The Relationship between ESG Performance and Sustainable Lending

There are various research results regarding the relationship between ESG performance, or non-financial performance, and economic performance and company financial performance. Cek and Eyupoglu’s research [9] describes a strong relationship between ESG performance and economic performance and individually shows the real influence of social and governance aspects. ESG performance has a positive impact on financial performance, where governance aspects have a very strong influence compared to other aspects [11]. There is a significant influence of social and governance aspects on credit ratings [22]. Research by Farida et al. [66] in Indonesia shows that the people’s business credit program product is an entry point to the micro-enterprise’s households’ segment of the bank. Yilmaz’s research [12] on BRICS countries revealed that although there is a significant positive relationship between the total ESG score and financial performance, the individual environmental, social, and governance scores are not significant.

ESG is relevant to having a positive effect as a competitive advantage in the context of sustainable business. There is a broader influence suggested by Zhao et al. [67], where good ESG performance not only improves financial performance but also has a significant impact on investors, company management, decision-makers, and regulators, which are stakeholders. One of the key attractions to green investment is the company’s green brand [68]. As one element of ESG, green credit can promote green sustainable development [69]. Another element of ESG, corporate social performance, has a relationship with financial product safety [70]. In addition, there is an increase in the loan volume and the total value of household assets through access to extension services. The third element of ESG, a sound corporate governance structure, enhances loan quality and bank stability [71].

However, the increase in ESG financing needs to be aware of the potential for greenwashing by the borrower, namely exposing or claiming the application of green banking in their products or services excessively without a clear basis [72]. Therefore, minimizing the occurrence of green washing is achieved by increasing transparency through the disclosure of financial and non-financial reports of the company’s green policy and its achievements [73]. Based on the description above, the following hypotheses are arranged:

Hypothesis 4 (H4). 

ESG performance in commercial lending has a positive and significant effect on economic performance.

Hypothesis 5 (H5). 

ESG performance has a positive and significant effect on sustainable lending.

2.2.3. The Relationship between Economic Performance and Sustainable Lending

Lending growth coupled with increased profitability as an indicator of economic performance can reduce problem loans because banks are able to improve lending risk management through training [74]. Research by Lee and Rosenkranz [75] regarding the relationship between economic performance and sustainable lending in Asian countries shows that bank-specific factors such as rapid lending growth and excessive lending provision contribute to the occurrence of NPLs. OJK determines that apart from financial aspects, there are environmentally friendly products and the involvement of local parties [76] as economic performance that influences sustainable finance. This includes distributing financing for environmentally friendly products such as green energy, sustainable plantations, or green property. In the framework of sustainable finance, several principles were developed by institutions abroad, such as the Global Alliance for Banking on Values (GABV) [64], and domestically [65]. Both the OJK and GABV principles contain economic principles, which means that economic factors are related to sustainable financing. Based on this explanation, a hypothesis is formulated as follows:

Hypothesis 6 (H6). 

Economic performance has a positive and significant effect on sustainable lending.

Based on Hypothesis 1 and Hypothesis 6, there is an indirect relationship between the value chain concept and sustainable lending through economic performance, which gives birth to the following hypothesis:

Hypothesis 7 (H7). 

Value chain through economic performance has a positive and significant effect on sustainable lending.

Based on Hypothesis 2 and Hypothesis 5, there is an indirect relationship between the value chain concept and sustainable lending through ESG performance, which gives birth to the following hypothesis:

Hypothesis 8 (H8). 

Value chain through ESG performance has a positive and significant impact on sustainable lending.

2.3. Conceptual Framework of the Study

Based on the sustainable lending hypothesis above, a research conceptual model was prepared in Figure 3.

3. Methodology

3.1. Sample and Data Collection

This research was conducted at conventional state-owned banks in Indonesia, namely a group of banks that have core capital greater than IDR 70 trillion and are state-owned enterprises, in June-November 2023, consisting of three state-owned banks, which are headquartered in Jakarta. These three state-owned banks have similar processes and credit products and are the first movers in sustainable banking in Indonesia. The research data used were primary data obtained through a survey conducted with a questionnaire instrument with a purposive sampling approach. The questionnaire was distributed online to respondents who were credit managers in the credit unit, and 414 responses were received. Secondary data were obtained from sustainability reports and annual reports of the three banks and reports or publication data from the Financial Services Authority.

The characteristics of credit managers can be seen through the descriptive analysis of respondents in

Table 1. Characteristics of study respondents.

Variable	Description	Frequency	Percentage (%)
Gender	Male	264	63.77
	Female	150	36.23
Age	20–25	20	4.83
	26–35	224	54.11
	36–45	123	29.71
	46–50	18	4.35
	51–58	29	7.00
Educational qualification	Diploma	1	0.24
	Degree	319	77.05
	Master’s degree	91	21.98
	PhD	3	0.72
Work unit	Business unit	261	63.04
	Risk unit	124	29.95
	ESG unit	10	2.42
	Other units	19	4.59
Work unit location	Branches	20	4.83
	Head office	332	80.19
	Region	62	14.98
Credit segment	Corporate	148	35.75
	Commercial	114	27.54
	Small and medium enterprise	94	22.71
	Micro	27	6.52
	Others	31	7.49
Position	Relationship manager/risk manager	158	38.16
	Senior relationship manager/senior risk manager/team leader	118	28.50
	Department head	79	19.08
	Group head/division head	17	4.11
	Others	42	10.14
Authority to decide credit	No	327	78.99
	Yes	87	21.01
Work experience in credit	1–5 years	98	23.67
	6–10 years	150	36.23
	11–15 years	101	24.40
	16–20 years	36	8.70
	21–25 years	13	3.14
	26–35 years	16	3.86
Have/are managing ESG or SLL	No	238	57.49
	Yes	176	42.51
Ever read a bank’s sustainability report	No	111	26.81
	Yes	303	73.19
Activities that have been participated in improving the understanding of ESG or SLL	Socialization	176	42.51
	Workshop	150	36.23
	Training	42	10.14
	None	46	11.11
Total Respondents		414	100

. The majority of respondents consisted of 64% men and 36% women aged 26–35 years (54.11%) and 36–45 years (29.71%). Most respondents had a bachelor’s degree (77.05%) and a master’s degree (21.98%), with 6–10 years of work experience (36.23%), followed by 11–15 years (24.40%) and 1–5 years (23.67%). The number of male officials is generally greater than that of females. Other characteristics of credit managers shown through respondents are 63.04% from business units and 29.5% from risk units, consisting of 63.29% wholesale segment (35.75% corporate and 27.54% commercial) and 29.23% retail segment (22.71% SME and 6.52% micro). The respondents’ understanding of ESG loans is shown through their experience in managing ESG loans, where 42.51% of respondents have ever managed and/or are currently managing loans,73.19% of respondents stated that they have read the bank’s sustainability report, 42.51% have participated in socialization to increase their understanding of ESG, and 36.23% have attended workshops/seminars on ESG.

The description above shows that, in general, credit managers at the three state-owned banks that are the object of research have an understanding of ESG factors, especially sustainability loans. This is shown by the 11.11% of respondents who have never participated in training activities that increased their understanding of ESG and sustainability-linked loans (SLLs). Also, respondents generally have an understanding of the ESG sustainability of the banking institutions concerned. This can be seen in 73.11% of respondents who read the annual sustainability report of the banking institution concerned. From this perspective, especially from human resources in these banking institutions, it can be concluded that human resource management in the three state-owned banks is capable of synergizing ESG aspects, especially sustainability loans disbursed by these banks.

3.2. Research Instruments

The variables used are latent variables consisting of value chain (VC), economic performance (EP), ESG performance (SP), and sustainable lending (SL). VC has two dimensions, namely primary activities (PA) and support activities (SA). EP has four dimensions, namely financial performance (FP), green credit financing (GF), credit financing through social impact cooperation (CS), and credit financing based on ESG scores (CE). SP has three dimensions, namely environmental-oriented (EO), social-oriented (SO), and governance-oriented (GO). SL has five dimensions, namely the principle of responsible investment (PRI), the principle of social and environmental risk management (PSE), the principle of green washing awareness (PGA), the principle of governance (PG), and the principle of inclusion (PI). The measurement of indicators for observed variables uses a Likert scale. The Likert scale consists of five points ranging from one (strongly disagree) to five (strongly agree) in assessing the dimensions of sustainable lending by state-owned banks in Indonesia (

Table 2. Latent variables, dimensions and indicators according to literature review.

Variable	Dimensions	Indicator	Source of Indicator
Value Chain	Primary activities	Credit origination	Adapted from [6,25,26,27]
		Credit analysis
		Credit decisions
		Credit administration
		Credit monitoring
	Support activities	Human resources	Adapted from [7,8,29]
		Credit risk management
		Information technology
		Credit products and portfolio	Adapted from [30,31,32]
		Liquidity
Economic Performance	Financial performance	Credit growth	Adapted from [9,10,76]
		Credit quality
		Interest income
		Profitability
	Green credit Financing	Financing low-emission and waste projects Energy-saving project financing
		Financing projects that preserve nature
		Growth of environmentally friendly products
	Credit financing through social impact cooperation	Credit distribution cooperation with the government
		Credit distribution collaboration with large companies
		Credit distribution collaboration with cooperative institutions
		Bilateral credit distribution agreement with the debtor
	Credit financing based on ESG scores	Linked by ESG score terms between bank and debtor
		Incentives in accordance with the ESG score for debtors
		Improving bank reputation through implementing ESG measurement standards
ESG Performance	Environmental-oriented	Efficient use of resources	Adapted from [21,22,23]
		Reducing emissions and waste
		Environmental innovation
		Extinction of biological resources
	Social-oriented	Equality and equal opportunities
		Respect human rights conventions
		Commitment to the community
		Product responsibility
	Governance-oriented	Commitment to implementing governance principles
		Implementation of risk management and internal control
		Consider social and environmental aspects in decision-making
Sustainable Lending	Responsible investment	Consider economic factors and ESG aspects	Adapted from [64,65,76]
		Applying the principle of prudence in managing credit quality
		Generate sustainable, long-term profits
	Social and environmental risk management	Identify potential social and environmental risks
		Measuring the magnitude of the possibility and impact of social and environmental risks
		Mitigating the risk of critical risk
		Monitoring of critical risk mitigation
	Greenwashing awareness	Provisions for submitting reports on ESG score measurement results
		Monitor the development of ESG scores
		Follow up on decreasing ESG scores
	Governance	Transparency
		Accountability
		Responsibility
		Independent
		Fair
	Inclusive	Facilitate affordability for the entire community
		Maintain the availability of various lending products as needed
		Providing services to all debtors

).

3.3. Data Analysis Method

The conceptual model was developed from the value chain framework concept of the factors that play a role in lending distribution, followed by analysis of the data collected using structural equation modeling (SEM). The analysis was carried out to determine the relationship between the value chain (support activities and primary activities of the credit process) and economic performance and ESG performance, which influence the sustainable lending of state-owned banks in Indonesia. Evaluation of the measurement model was carried out to test the validity of indicators measured via loading factor (valid when loading factor > 0.5) and reliability measured via Cronbach’s Alpha and composite reliability (>0.6) and average variance extracted (AVE > 0.5). Meanwhile, the structural model evaluation looks at the significance of the influence using a p-value (p < 0.05, for a significance level of 5%).

4. Analysis and Result

4.1. Factors That Play a Role in Sustainable Lending

Based on the results of the analysis of the description of sustainable lending in three state-owned conventional banks, it is known that the credit distribution pattern consists of various credit process activities and internal resources and does not yet describe a sustainable business model. However, the three banks have distributed credit in the category of sustainable business activities, which over the last 5 years has grown an average of 10.1% every year. Credit managers have an understanding of providing sustainable credit;89% of credit managers have participated in ESG training, 73% have read bank sustainability reports, 60% have 6–15 years of experience, and 43% directly manage ESG credit.

An evaluation of the measurement model was carried out to test the validity of indicators measured through loading factors and reliability measured through Cronbach’s Alpha (CA) and composite reliability (CR), as well as average variance extracted (AVE) on the dimensions. Based on the results of the measurement model analysis, it shows that all loading factor values for each indicator are above the threshold of 0.5, as well as CA and CR values above 0.6 and AVE above 0.5. So, it is concluded that all indicators have good construct validity and reliability, as shown in

Table 3. Evaluation of measurement model.

Dimensions	Indicator	Loading
Cronbach’s Alpha = 0.922; CR = 0.898; AVE = 0.691
Primary activities	Credit origination	0.890
	Credit analysis	0.926
	Credit decisions	0.912
	Credit administration	0.760
	Credit monitoring	0.732
Cronbach’s Alpha = 0.899; CR = 0.899; AVE = 0.645
Support activities	Human resources	0.833
	Credit risk management	0.871
	Information technology	0.880
	Credit products and portfolio	0.738
	Liquidity	0.733
Cronbach’s Alpha = 0.923; CR = 0.923; AVE = 0.750
Financial performance	Credit growth	0.801
	Credit quality	0.886
	Interest income	0.898
	Profitability	0.882
Cronbach’s Alpha = 0.868; CR = 0.868; AVE = 0.622
Green credit financing	Financing low-emission and waste projects	0.835
	Energy-saving project financing	0.740
	Financing projects that preserve nature	0.823
	Growth of environmentally friendly products	0.778
Cronbach’s Alpha = 0.839; CR = 0.842; AVE = 0.574
Credit financing through social impact cooperation	Credit distribution cooperation with the government	0.738
	Credit distribution collaboration with large companies	0.818
	Credit distribution collaboration with cooperative institutions	0.698
	Bilateral credit distribution agreement with the debtor	0.806
Cronbach’s Alpha = 0.845; CR = 0.699; AVE = 0.534
Credit financing based on ESG scores	Linked by ESG score terms between bank and debtor	0.768
	Incentives in accordance with the ESG score for debtors	0.632
	Improving bank reputation through implementing ESG measurement standards	0.819
Cronbach’s Alpha = 0.899; CR = 0.899; AVE = 0.692
Environmental-oriented	Efficient use of resources	0.734
	Reducing emissions and waste	0.906
	Environmental innovation	0.901
	Extinction of biological resources	0.819
Cronbach’s Alpha = 0.919; CR = 0.839; AVE = 0.672
Social-oriented	Equality and equal opportunities	0.762
	Respect human rights conventions	0.727
	Commitment to the community	0.877
	Product responsibility	0.931
Cronbach’s Alpha = 0.891; CR = 0.898; AVE = 0.746
Governance-oriented	Commitment to implementing governance principles	0.949
	Implementation of risk management and internal control	0.928
	Consider social and environmental aspects in decision-making	0.753
Cronbach’s Alpha = 0.890; CR = 0.889; AVE = 0.729
Responsible investment	Consider economic factors and ESG aspects	0.878
	Applying the principle of prudence in managing credit quality	0.804
	Generate sustainable, long-term profits	0.878
Cronbach’s Alpha = 0.957; CR = 0.957; AVE = 0.848
Social and environmental risk management	Identify potential social and environmental risks	0.940
	Measuring the magnitude of the possibility and impact of social and environmental risks	0.935
	Mitigating the risk of critical risk	0.928
	Monitoring of critical risk mitigation	0.881
Cronbach’s Alpha = 0.971; CR = 0.972; AVE = 0.920
Greenwashing awareness	Provisions for submitting reports on ESG score measurement results	0.957
	Monitor the development of ESG scores	0.978
	Follow up on decreasing ESG scores	0.941
Cronbach’s Alpha = 0.934; CR = 0.919; AVE = 0.735
Governance	Transparency	0.802
	Accountability	0.888
	Responsibility	0.943
	Independent	0.796
	Fair	0.874
Cronbach’s Alpha = 0.923; CR = 0.927; AVE = 0.809
Inclusive	Facilitate affordability for the entire community	0.919
	Maintain the availability of various lending products as needed	0.922
	Providing services to all debtors	0.848

.

In order to determine the suitability of the measurement model and structural model in sustainable credit distribution, a goodness-of-fit test was carried out. The criteria used in the goodness-of-fit test include, among others, RMSEA, CFI, IFI, PNFI, and PGFI. The test results show that all five are in the fit category, so it can be concluded that the sustainable credit distribution model is quite good. The results of the goodness-of-fit test for the SEM model are shown in

Table 4. Goodness-of-fit model SEM.

Criteria	Value	Threshold	Description
RMSEA	0.065	<0.08	Fit
CFI	0.901	>0.9	Fit
IFI	0.901	>0.9	Fit
PNFI	0.804	>0.5	Fit
PGFI	0.655	>0.5	Fit

.

In testing the contribution of dimensions to variables, it is measured through loading factors, which represent contribution, and by p-value as a significance test. Analysis of the measurement model for testing the significance of the contribution of dimensions to latent variables shows that all dimensions in each latent variable have significant contributions, as represented by a loading factor above 0.7 and a p-value below 5%. There are 14 dimensions from 4 variables that play a role, namely primary activities (PA), support activities (SA), financial performance (FP), green credit financing (GF), credit financing through social impact cooperation (CS), credit financing retrieved from ESG scores (CE), environmental-oriented (EO), social-oriented (SO), governance-oriented (GO), the principle of responsible investment (PRI), the principle of social and environmental risk management (PSE), the principle of green washing awareness (PGA), the principle of governance (PG), and the principle of inclusion (PI).

In the VC variable, the SA dimension has a greater contribution compared to PA. The SA dimension of credit distribution is the bank’s strategic factors in providing credit to debtors, while the PA dimension is the bank’s operational activities in the credit process for debtors. In accordance with the resource-based view [34], resources that can be utilized to achieve competitive advantage come from infrastructure, capital, and human resources. In the EP variable, the GF dimension has the largest contribution. This financing trend is in line with the indicators studied [22]. As for the SP variable, the SO dimension provides the largest contribution compared to the other two dimensions, GO and EO. This result is in accordance with the research of Cek and Eyupoglu [9] and is in line with the trend of disbursement of ESG-linked loans, which is much larger than green loans [2]. The social aspect includes product responsibility and system reliability, which play a role in protecting the interests of debtors, and also includes respect for human rights in the form of equality [22]. Responsible products, reliable systems, and easy access are highly expected by debtors to maintain comfortable transactions. However, the results of this study are different from the findings of Taliento et al. [20], who do not look at the impact of individual ESG performance on economic performance. In the SL variable, the largest contribution comes from the PRI. This is in accordance with stakeholder’s theory, which explains the fulfillment of stakeholder’s interests so that the organization lasts [13]. Fulfilling interests is not only limited to economics but also takes into account environmental, social, and governance responsibilities. Figure 4 presents the result of structural equation model analysis and the impact of the relationships between factors and constructs.

4.2. The Influence of Value Chain, Economic Performance, and ESG Performance on Sustainable Lending

In the evaluation of the structural model, which tests the significance of the influence of exogenous variables on endogenous variables, it is divided into two categories, namely direct influence and indirect influence. Indirect influence, or indirect effect, is the influence of a variable that is mediated by other variables. Research hypothesis testing is presented in

Table 5. Testing the influence (hypothesis testing) between variables.

Path Influence	Estimate	Std. Err	t-Value	p-Value	Information
Direct Effect
Value chain → economic performance	0.237	0.048	4.972	0.000	Accepted
Value chain → ESG performance	0.875	0.087	10.003	0.000	Accepted
Value chain → sustainable lending	0.113	0.045	2.537	0.011	Accepted
ESG performance → economic performance	0.583	0.053	10.969	0.000	Accepted
ESG performance → sustainable lending	0.654	0.072	9.141	0.000	Accepted
Economic performance → sustainable lending	0.187	0.072	2.615	0.009	Accepted
Indirect Effect
Value chain → economic performance → sustainable lending	0.044	0.019	2.288	0.022	Accepted
Value chain → ESG performance → sustainable lending	0.572	0.069	8.298	0.000	Accepted

Description: significant with a real level of 5%.

.

Based on the hypothesis testing shown in Table 3 above, the p-value obtained for each hypothesis path is smaller than the 5% real level, so it can be concluded that the path relationship or influence between variables is significant. VC has the largest positive effect on SP, followed by EP and SL, which means that the better the VC, the better the SP, EP, and SL. The research results of Rahat and Nguyen [59] confirm previous findings that show that value chain supporting activities in the form of credit portfolios, human resources, information technology, risk management, and financial capacity influence ESG performance [60]. Likewise, the influence of value chain supporting activities on economic performance is in line with the research results of Jiang et al. [38], where a higher capital ratio has a positive effect on credit growth and profitability and credit risk management has a positive effect on company value [77]. Meanwhile, the influence of VC on SL comes from funding liquidity [38].

Another result is that SP has a positive effect on EP and SL. The influence of SP on EP is in line with the results of research by Menicucci and Paolucci [21], which shows that reducing emissions and waste has a positive effect on operational and financial performance, and research by Gutiérrez-Ponce and Wibowo [23], where social aspects have a positive effect on ROA and ROE. Meanwhile, the positive influence of SP on SL is in line with the results of research by Pyka and Nocoń [24], which shows that ESG risks increase bank involvement in implementing sustainable finance, and research by Bao and He [69] shows that green credit encourages sustainable development, as well as research by Salim et al. [70], who found that corporate social performance has a positive relationship with financial product security. EP also has a positive effect on SL, although not as much as the effect of SP. This is in accordance with Yilmaz’s research [12] regarding the relationship between corporate sustainability and financial performance through net profit margin and operating profit margin.

Testing the indirect effect of the value chain on sustainable lending shows that all of them have a positive effect. The indirect influence of the value chain on sustainable lending is mediated by ESG performance with an influence size of 0.572, while that is mediated by economic performance with a much smaller value (0.044). Figure 5 shows the result of the structural equation model analysis of this research and reveals the impact of the relationships between constructs.

To complement the overall data analysis, the study includes results for each bank tested: Bank A, Bank B, and Bank C. The outcomes of the multi-group structural equation modeling analysis for each bank are detailed in

Table 6. Analysis of each bank of research respondents.

Data set	Path	Estimate	Std. Err	t-Value	p-Value	Decision	R2
Bank A	Value chain → economic performance	0.515	0.141	4.501	0.000	Accepted	0.873
	Value chain → ESG performance	0.754	0.192	5.783	0.000	Accepted
	Value chain → sustainable lending	0.407	0.145	3.444	0.001	Accepted
	ESG performance → economic performance	0.410	0.088	3.881	0.000	Accepted
	ESG performance → sustainable lending	0.636	0.107	4.975	0.000	Accepted
	Economic performance → sustainable lending	−0.054	0.120	−0.443	0.658	Not Accepted
Bank B	Value chain → economic performance	0.118	0.051	2.200	0.028	Accepted	0.878
	Value chain → ESG performance	0.611	0.106	6.978	0.000	Accepted
	Value chain → sustainable lending	0.027	0.051	0.593	0.553	Not Accepted
	ESG performance → economic performance	0.784	0.075	8.319	0.000	Accepted
	ESG performance → sustainable lending	0.810	0.116	6.491	0.000	Accepted
	Economic performance → sustainable lending	0.126	0.115	1.293	0.196	Not Accepted
Bank C	Value chain → economic performance	0.399	0.165	3.866	0.000	Accepted	0.935
	Value chain → ESG performance	0.652	0.275	4.493	0.000	Accepted
	Value chain → sustainable lending	0.050	0.156	0.589	0.556	Not Accepted
	ESG performance → economic performance	0.631	0.112	4.764	0.000	Accepted
	ESG performance → sustainable lending	0.482	0.132	3.526	0.000	Accepted
	Economic performance → sustainable lending	0.473	0.205	2.635	0.008	Accepted

. The results show that most of the hypotheses in each sub-group are proven by the data or accepted. The goodness-of-fit model based on R2 in all subgroups has good criteria where the R2 value is above 0.850 and even the highest reaches 0.935 (bank C).

There is no difference in the variables that have the most influence on sustainable lending in both the general model (overall data) and the banks where ESG performance has the greatest influence on sustainable lending.

Apart from that, ESG performance significantly influences economic performance, as evidenced in both the overarching model and the specific analysis of three banks.

5. Discussion and Implications

The purpose of this study was to identify the condition of sustainable lending in state-owned commercial banks and analyze the influence of value chain, economic performance, and ESG performance on sustainable lending. The results of this study showed that value chain (VC), ESG (environmental, social, and governance) performance (PS), and economic performance (EP) have direct and positive influences on sustainable lending (SL), where ESG performance (SP) has the largest influence. For each aspect, social orientation (SO) contributes the most to sustainable lending. In addition, testing the direct effect of the value chain on sustainable lending shows that all of these have a positive effect. The indirect effect of the value chain (VC) on sustainable lending (SL) mediated by ESG performance (SP) has a larger effect than that mediated by economic performance (EP).

5.1. Theoretical Implication

There are several significant implications related to the research results on theory, where, from the value chain (VC) approach, a method can be developed in measuring the role of factors that affect sustainable lending in commercial banks. In this case, it is done by introducing the generic value chain performance, which was originally limited to margins, into economic performance (EP) and ESG performance (SP). In addition, adjustments to the dimensions in the EP variable in the form of financing on the basis of ESG score (CE) and dimensions in the sustainable lending (SL) variable in the form of greenwashing awareness principles (PGA) (which have not been found in previous literature) show a significant contribution to sustainable lending. Likewise, the adjustment of two indicators of the support activities (SA) dimension of the value chain variable in the form of credit portfolio and liquidity to add to the existing elements in the previous literature (risk management, human resources, and technology development) makes AP one of the dimensions that make a major contribution to the value chain.

5.2. Managerial Implication

The managerial implications of this research are divided into managerial implications for banks and for regulators. Considering that the results show ESG (environmental, social, and governance) performance (SP) and economic performance (EP) have a direct and positive effect on sustainable lending (SL), there are managerial implications for banks, including the following: (1) improving the social aspect of sustainable lending through digital transformation, where banks can reach potential borrowers in rural areas and make it easier for borrowers to apply for credit from the bank in the context of developing small businesses. This is done by adopting digital technology and implementing it in the credit process without going through a physical branch (branchless banking). By being able to be accessed online, digital banks can make it easier for business actors to access various business capital services; (2) the development of bank products with a social perspective (for example, credit products to support young entrepreneurs, migrant workers, and infrastructure projects in rural areas) and a green perspective (such as credit products for conservation projects); and (3) the development of ESG loan products such as sustainability-linked loans or ESG-linked loans (ESG-oriented products are provided according to the quality of the debtor’s ESG rating). Managerial implications for regulators include the following: (1) expanding the scope of sustainable lending, not only depending on the intended use of funds for social lending or green lending categories, but also by opening a new ESG-linked-loan category; (2) adjusting the credit risk profile in assessing the bank’s health level by adding social risk parameters as indicators of sustainability.

6. Conclusions and Future Research

The research results show that internal bank factors play a role in sustainable lending, as reflected in the results of the analysis of significant dimensional contributions to four variables, consisting of 14 dimensions, namely primary activities, support activities, financial performance, environmentally friendly lending financing, credit financing through social impact collaboration, and credit financing based on ESG scores, environmental-oriented, social-oriented, governance-oriented, responsible investment principles, social and environmental risk management principles, green washing awareness principles, governance principles, and inclusive principles. The indicators with the largest loading factor representing each dimension are credit risk management, low-emission and waste project financing, product responsibility, and responsible investment principles. Directly, three determinants of sustainability, which are the value chain (VC), economic performance (EP), and ESG performance (SP), have a positive influence, with SP having the greatest influence, followed by EP and VC. Indirectly, the value chain (VC), through economic performance (EP) and ESG performance (SP), has a positive effect, and the biggest influence is mediated by SP above EP. Value chain, ESG performance, and economic performance can explain sustainable lending very well. Therefore, the value chain, ESG performance, and economic performance can be used as a basis for developing sustainable business models.

For further research, the following things need to be considered and followed up: (1) expanding research data collection to include private banks, regional development banks, and sharia banks so that they can represent the population of the banking industry in Indonesia; (2) future research can be expanded by utilizing respondent data from different fields experts to evaluate the significant challenges of sustainable lending in Indonesia and several other developing countries; (3) research into how technology and innovation can strengthen the value chain and improve ESG performance in sustainable lending is important for the future. This is particularly relevant given the dynamic nature of financial technology (fintech), which can have a major impact on lending methodologies. Investigations regarding financial technology (fintech) are very important to increase understanding of mechanisms that can encourage sustainable lending and to provide input for the development of effective strategies and policies in the field of sustainable finance.