Aisah 1 Mut’mainna 2 , Syafira Larasati Yasram 3
3. The Spirit of Islamic-Religious Values in the Principles of Integrated Reporting
The business world has recognized the accounting profession as having an important role. They have the responsibility to participate in efforts to adopt the spirit of religiosity in the implementation of Integrated Reporting in the business realm. Corporations and other business entities can implement the religious spirit by adopting this integrative concept into business practices.
Alignment between the theoretical concepts of Integrated Reporting Principles and the spirit of religiosity, conceptual ideas are developed through the five basic principles of Integrated Reporting. The five principles can be seen as follows:
a. Strategic Focus. Integrated reports describe an organization's goals and resources in creating and sustaining organizational value. In Islamic business, business strategy is also called competitive strategy and how to create short-, medium- and long-term value. Islamic business strategy integrates various functional activities to achieve goals These goals cover four things: (a) Targets and results (b) Growth (c) Sustainability and (d) Blessings (Alimuddin & Ruslan, 2021).
b. Connectivity of Information. Connectivity of information related to integrated reporting elements includes organization and external environment, strategy and resource allocation, governance, business models, risks and opportunities, performance, outlook, and presentation basis. These elements are interconnected and not mutually exclusive. In Islamic business practices, all these elements are framed in the form of honesty and truth values. Organizations are run not solely for profit but also for social benefits and environmental sustainability. All resources are used effectively and efficiently but do not over-exploit nature.
c. Future Orientation. Businesspeople always strive to reduce risk to predict the level of uncertainty and increase profits. In Islam, risk reduction is carried out through a mudharabah contract where ownership of capital is not based on risk but on ownership of goods or work results. Production risk related to inventory, the company must consider the risk of decreasing inventory value due to damage, loss or defective products that can result in a decrease in wealth.
d. Stakeholders Relationships. The concept of stakeholders from conventional stakeholder theory still has a fundamental deficiency, in which entities in carrying out their business do not connect God with their activities. God, as the owner of the universe, is the highest stakeholder in an Islamic perspective, and all human actions must be aligned with Him. Carrying out God's commands and prohibitions related to aqidah, sharia, and morals allows humans to establish relations with Him. Chapra and Ahmed (2002:14) state that "the most important stakeholder in the case of Islamic finance is Islam itself" meaning that the most important stakeholder is God, so Islamic values must underlie business practices.
e. Materiality, Reliability and Completeness. Honesty is a characteristic and moral trait that becomes the identity of believers. Religion will not stand upright without being based on honesty and life will not go well. (Qardhawi, 2000a). Business will not run well if it is not based on the honesty of the owners and employees of the company. Financial statements are the result of a combined process of transactions or events. The materiality of the financial statements affects the relevance of information. Information is considered material if an error in recording the information can affect a decision.
Accounting transactions must be carried out transparently and prohibit bai’ul gharar because one party does not know the condition of a product to the detriment of others (Arifin, 2010).
High awareness of moral values and religiosity in the principles of Integrated Reporting is not intended to replace the current concept of financial reporting. This conceptual idea is understood as a transformation step over the conventional reporting concept into a more advanced concept. Religious values in religious teachings are related to honesty, sincerity and justice or the harmony of life with wisdom, love, compassion, understanding, and empathy practiced in earnest, then these principles can bring humanity into behaviors that lead to harmony life (Sudana, 2016; Triyuwono, 2016).
CONCLUSION
The change in the business paradigm towards value creation shows that people are increasingly aware of the importance of moral and religious values.
This awareness triggers changes in society regarding ethics and social responsibility that have been neglected so far. The profit-oriented conventional accounting basis shifts to creating value for stakeholders through a sustainability strategy, giving rise to an evolution in financial reports that leads to integrated financial reports. In practice, these modern financial reports require alignment with the values of truth, honesty, and fairness, to foster public awareness of the importance of accounting that is built on Islamic values, so that these values can be upheld in social life. The implication of this article is that the Indonesian Financial Accounting Standards Board (DSAK) stipulates regulations regarding the obligation of companies to make integrated reporting based on the spirit of religious values, economic values, social values, and environmental values, so that the company's orientation is not only about profit maximization. The sustainability of the company in creating long-term value can be achieved by integrating these five value dimensions in financial reports and implementing them in sound business practices.
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EFFECT OF ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) AND FINANCIAL SLACK ON FIRM PERFORMANCE?
Cindy Getah Trisna June Pujangga Abdillah
Parawiyati
Szabyna Regytha Aura Gunawan
Accounting Department, University of Merdeka Malang ABSTRAK
The purpose of this study is to investigate the impact of ESG (Environment, Social, and Governance) and financial slack on firm performance. Property sectors registered based on IC (Industrial Classification) in the Indonesia Stock Exchange between 2020 and 2022 make up the population of this study. Samples were taken using the judgment sampling technique with a total sample of 214 observations. The data analysis approach employed is regression analysis and data testing was performed using STATA. The findings demonstrated that ESG influences firm performance as evaluated by Return on Asset (ROA). In other words, firm performance can increase with better ESG standards. The findings of this study also demonstrate that financial slack can boost the impact on firm performance.
Keywords: Firm Performance, Financial Slack, ESG INTRODUCTION
One approach for businesses to enhance investor welfare is by increasing their profitability. This achievement can be improved through better firm performance. Al-matari et al., (2014), the company's performance is the first aspect that will be assessed by investors and other interested parties. Financial performance measurement is used to determine the results the firm has accomplished in accordance with the plan, therefore it may be used to measure overall firm performance (Muntiah, 2013). Firm performance is the ability to carry out business activities and the company uses it to determine the success of profitability (Riwukore, 2022).
Based on financial report data published on the Indonesia Stock Exchange (IDX), the financial performance of the property and real estate sector in recent years has recorded a large decline compared to the previous year (Ananda et al., 2022). Even in the last few years, the property sector has always been one of the most attractive sectors for foreign or domestic investors (Datanesia, 2023).
Financial performance is one of the factors that is seen by potential investors to determine investment, so financial performance must always be better (Wijayanti, 2018). Implementation of good and correct performance has a positive effect on the company and produces a good reputation in the eyes of the public or investors (Ningwati et al., 2022).
Currently, the disclosure of non-financial factors such as ESG disclosure indicators by companies has the aim of providing additional information regarding the company's financial performance that has not been raised in annual report data or financial reports. The financial reports attached by companies often do not contain information such as company reputation, quality, brand equity, and security. Through the disclosure of information related to ESG disclosure,
environmental, social, and corporate governance coverage factors can be displayed in company reports in more detail (Nugroho and Hersugondo, 2022).
Environment, Social, and Governance (ESG) is believed to be able to encourage better firm performance (Alfaruq, 2021).
World-class institutions, such as Standard & Poor's, Bloomberg, and Fitch, among others, have evaluated how well companies operate in terms of environment, social, and governance (ESG) (Priandhana, 2022). Sustainability reports are applied to issuers based on the sector from 2019 and will be fully implemented in 2025 (Woro and Dewita, 2022). According to Noviarianti (2020), ESG is a standard of corporate investment practice that integrates and implements company policies in a manner that is consistent with environmental, social, and governance concepts. The state of the global industry that continues to grow, makes the company's business processes also develop. This economic progress has also been accompanied by a decline in environmental aspects with environmental damage in recent years (Husada and Handayani, 2021). According to the 2022 Environmental Performance Index, Indonesia's environmental preservation is classified as the lowest on a global and Asia Pacific regional scale (Ahdiyat, 2022).
Based on Kalia and Aggarwal (2023); Liu et al., (2022), and Naeem (2022), explain that ESG affects firm performance. Another study conducted by Pickwick and Sewelén, (2021); Junius et al., (2020), has different results in that ESG does not influence firm performance. In specific, there are no consistent conclusions about the impact of ESG on firm performance. This study refers to the research of Gao (2022), explaining the relationship between ESG and firm performance based on panel data. The first distinction between this study and earlier ones is the use of ROA (Return of Assets) instead of z-score normalization to measure financial success. ROA is a more accurate indicator of a company's profitability since it demonstrates how well management uses its resources to generate income (Kasmir, 2012).
The second difference in this study is the addition of financial as an independent variable between ESG and financial performance. Based on Duque and Caracuel (2021), explain that financial slack has an influence on financial performance, so financial slack becomes a positive effect on financial performance. Based on Chu et al., (2021); Guo et al., (2020), and Rafailov (2017), explain that financial slack affects financial performance. Another study conducted by Silalahi, (2015), has different results in that financial slack does not influence financial performance. The inconsistency of the research results on the effect of financial slack on firm performance is thought to be due to differences in managers' choices for investment, experimentation, and risk-taking that have performance. Financial slack can be sourced from management policies used to improve environmental sustainability and finance innovation or change and increase the company's response to environmental disturbances within the company (Latham & Braun, 2008).
As a result, this study supports the legitimacy theory and stakeholder theories. The findings can be utilized to advise management on appropriate corporate practices and boost business success. Also, the regulator will use this research as a source of information when determining the environment, society, and government. The stakeholder theory and legitimacy theory that is used to explain and suggest the tested hypothesis is covered in the next section. As a result, the research methodology section explains how this study was carried out.
The research findings are presented and discussed in the results and discussion
section. The conclusion and recommendations for further studies can be found in the last section of this research.
LITERATURE REVIEW Legitimacy Theory
The business works to make sure that outsiders view its operations as
"legal" (Degaan, 2006). There will, undoubtedly, always be discrepancies between the values upheld by the business and those maintained by the community. A "legitimacy gap," or discrepancy between corporate and social norms, can make it difficult for a corporation to carry on with its operations. The broad perception or idea that an entity's acts are desirable, legitimate, or suitable in some socially constructed system of norms, values, and beliefs. Based on Suchman’s (2014), legitimacy theory stated that companies must pay attention to each of their activities so that they are in accordance with the social values and norms that apply in the community where the company is located so that the company gains legitimacy from the community
Legitimacy can be a very crucial consideration for businesses planning future expansion strategies. Hadi (2014: 87) claims that the psychological condition of people and groups that choose sides and are extremely sensitive to environmental symptoms in both the physical and non-physical environment is legitimate. In other words, legitimacy is determined by the community's response, and the corporation seeks that response. According to this viewpoint, legitimacy can be viewed as a resource that the corporation may use to further its mission of survival. Hadi (2014: 87) defines legitimacy as a management philosophy of businesses that emphasizes alignment with the community, local governments, and community organizations. Based on Meutia (2010: 78) equates legitimacy with the belief that group procedures are legitimate.
Stakeholder Theory
Stakeholder theory is one of the strategic issues surrounding how companies manage relationships with stakeholders (Bani-Khalid & Kouhy, 2017). According to this theory, companies must pay attention to and benefit stakeholders because their existence can influence or be influenced by policies taken by companies in their business activities. The concerned stakeholders don't just concentrate on the shareholders. It is intended that the support and attention offered by these stakeholders would be able to positively affect the company's performance, notably through investment support or capital involvement that can improve the business.
According to Hadi (2014: 93), stakeholders are people or groups that the business can affect. Both internal and external stakeholders, including the government, rival businesses, nearby communities, workers, and non-governmental organizations (NGOs), may have an impact on or be influenced by the firm.
Deegan (2004) introduced the idea of stakeholder theory, which showed that management has a fiduciary duty to all stakeholders, not just shareholders.
Stakeholder interests must all be taken into account equally by management, and each stakeholder has a minimum standard that cannot be disregarded.
ESG
ESG is a socially constructed phenomenon (Eccles et al., 2020). ESG refers to a company's corporate governance, social responsibility, and
environmental initiatives. ESG is essentially the collection of environmental, social, and governance activities carried out by any firm with the aim of ensuring its sustainability and meeting the needs of all stakeholders while preserving and boosting its financial worth (Naeem and Çankaya, 2022). Publicly traded firms have seen an increase in the use of ESG disclosures in recent years as they try to involve stakeholders, meet investors, build credibility, and respond to crises and competition in their industries. various industries (Olsen et al., 2021). ESG is a development of corporate social responsibility (CSR) and socially responsible investing (Chen and Xie, 2022).
Firm Performance
Firm performance is a picture of the condition of a firm in a certain period of time which is the result of operational activities carried out by utilizing the resources (Abdillah, 2022). According to Sianturi (2020), a company's financial performance is a description of a company's financial condition which is analyzed using financial analysis tools so that it can be known about the company's financial condition that reflects work performance in a certain period. It is imperative for a company to maintain and improve financial performance so that these shares remain in demand by investors (Islamiya, 2016).
The company's financial performance is one of the factors considered by potential investors to determine investment (Abdillah and Mennita, 2022). The good and bad conditions of a company can be described through the financial performance of the company (Sartini et al., 2023). This can be known by conducting analysis using financial analysis tools to find out the pros and cons of a company's financial condition and financial performance at a certain time (Wibowo & Faradiza, 2014).
Financial Slack
Financial slack can be sourced from management policies used to improve environmental sustainability and finance innovation or change and increase the company's response to environmental disturbances within the company (Latham
& Braun, 2008). Financial Slack can be a useful resource for organizations to help achieve organizational goals (Vanacker et al., 2013). A concept called "financial slack" relies on the idea of "financial reserves as a buffer" and "accessible financial resources may enable organizations to develop and grow more quickly."
(Jaber and Yasir, 2022). Financial slack is the least absorbed form of slack, especially because this slack can be fully divided and separated for the allocation of various activities (Greve, 2003).
Based on Beuren et al., (2014) there would be evidence of an inverse relationship between slack and short-term performance -although in the long term, there is a decrease in effect. The basic definition of financial slack is that resources include potential or actual resources that can help any organization successfully adapt to change (Bourgeois, 1981; Meyer, 1982).
The Influence of ESG on Firm Performance
Non-financial disclosures like ESG are anticipated to transform into a societal investment to satiate stakeholder interests, which will subsequently improve firm performance (Sarasmitha et al., 2022). Due to the increased attention that sustainability initiatives receive from company stakeholders, businesses will experience higher demand and greater development (Buallay, 2019). ESG disclosure is also a tool to gain strong legitimacy in the eyes of
society and stakeholders so this disclosure it is hoped that a good image for the company can be created (Triyani et al., 2020).
According to the legitimacy hypothesis, it is anticipated that the corporation would keep looking for legitimacy among people who have an interest in it both directly and indirectly. ESG is a tool for businesses to keep up their credibility. Stakeholder theory and some recent empirical research support the idea that ESG will boost firm performance. Based on Kalia and Aggarwal (2023); Liu et al., (2022), and Naeem (2022), explained that in general the results of research conducted on the relationship between ESG and finance performance showed positive results. Thus, the hypothesis regarding the effect of ESG on firm performance is
𝐻1: ESG has a positive effect on firm performance
The Influence of Financial Slack on Firm Performance
Concerns are raised by the lack of funding for public education on environmental and social issues, highlighting the relationship between easier access to knowledge and ESG participation. More individuals are choosing products based on brands. Customers do so because they think they have a chance to positively impact the world. Transparency in digital technology makes it simple for the consumer to determine which brands are socially responsible.
Schuler and Cording (2006) found that there is a greater chance that ESG will improve firm performance. Financial slack is firm performance. Thus, it's crucial to consider how to train management to create ESG behaviors that genuinely consider stakeholders, boost sustainability, and enhance financial success.
Stakeholder and financial slack working together can give the business a competitive edge (Yulinda et al., 2022). Based on Grisales and Caracuel (2021), explained that financial slack strengthens on firm performance. Thus, the hypothesis regarding the relationship of financial slack between ESG and firm performance is
𝐻2: Financial Slack has a positive effect on firm performance
Figure 1. Research Model RESEARCH METHOD
Firms in the property sectors listed on the Indonesia Stock Exchange make up the study's sample on IDX-IC. The firms that publish audited annual reports in Rupiah from 2019 to 2021 make up the sample. There are evaluated these criteria, this study got a final sample of 214 firms with a total of 258 observations with details in the following Table 1:
Profitability Size Age
Control Variable
Finanl Slack ESG Performance Financial