Green Pays: ESG Performance Shapes Dividends in Indonesia’s Energy Firms

For years, corporate sustainability research has wrestled with a deceptively simple question: does being green actually pay? A new study from Universitas Gadjah Mada in Indonesia adds a fresh and surprisingly concrete answer, at least for one of the world’s most carbon-intensive industries. Examining 33 energy companies listed on the Indonesia Stock Exchange between 2020 and 2024, researchers Misran, Bevaola Kusumasari, and Agustinus Subarsono found that strong environmental, social, and governance performance is associated with richer dividend payouts to shareholders, while heavy carbon emissions drag those payouts down. The work, published in the journal Discover Sustainability, is among the first to connect ESG performance, carbon emission intensity, and green capital expenditure directly to corporate dividend policy in an emerging market, and it arrives at a moment when investors worldwide are demanding hard evidence that sustainability is more than a public relations exercise.

The research team framed their inquiry around a gap in the existing literature. Most empirical studies of corporate sustainability have focused on how ESG performance relates to profitability or market value, leaving dividend policy largely unexplored. Dividends, however, are where a company’s financial health becomes tangible for its owners: they represent cash returned to shareholders rather than retained or reinvested. Whether a firm chooses to distribute that cash, and how much, reflects management’s confidence in future earnings, its exposure to risk, and the quality of its investment opportunities. By asking whether sustainability credentials influence this decision, the researchers tapped into a live debate about whether environmental responsibility competes with shareholder returns or reinforces them. Their answer, drawn from five years of firm-level data in a rapidly developing economy, leans decisively toward reinforcement.

Methodologically, the study is more sophisticated than a simple correlation exercise. Because dividend decisions are notoriously sticky, companies that paid generous dividends last year tend to pay them again this year, the authors employed a two-step system generalized method of moments, or system GMM, dynamic panel model. This econometric technique is designed for exactly this kind of problem: it accounts for the persistence of dividend behavior over time by including lagged dividends as an explanatory variable, and it uses internal instruments to address the endogeneity that plagues simpler regressions, where causality might run in either direction. The dataset comprised 165 firm-year observations, with dividend policy measured through two complementary indicators: dividend yield, which expresses payouts relative to share price, and the dividend payout ratio, which expresses them relative to earnings. Control variables included firm size, profitability, leverage, liquidity, and the lagged dividend itself, allowing the sustainability variables to be evaluated on a like-for-like basis against the established drivers of payout decisions.

The headline finding is that ESG performance exerts a considerable positive influence on dividend policy. In other words, energy companies that scored higher on environmental, social, and governance metrics tended to return more cash to their shareholders, whether measured by yield or payout ratio. This result challenges the old argument that spending on sustainability starves shareholders of returns. Instead, it suggests that strong ESG performance signals well-managed, lower-risk firms whose cash flows are more reliable, giving management both the confidence and the capacity to distribute earnings. In an industry where regulatory scrutiny, community relations, and environmental liabilities can make or break a project, a high ESG standing may function as a kind of insurance policy, reducing the volatility that would otherwise push managers to hoard cash.

Carbon emission intensity told the opposite story. Firms that emitted more carbon dioxide relative to their output paid significantly less in dividends, a pattern the researchers interpret as evidence that high environmental risk hinders payouts. The logic is intuitive: carbon-heavy companies face mounting exposure to carbon pricing, tightening regulation, stranded assets, and shifting investor preferences, all of which make future cash flows less certain. Rational managers respond by retaining earnings as a buffer against these risks rather than committing to distributions they might later have to cut. The finding carries particular weight in Indonesia, where the energy sector sits at the heart of national development strategy and where the transition away from fossil fuels raises profound questions about which companies will remain profitable, and creditworthy, in the decades ahead.

Perhaps the most striking result concerns green capital expenditure, the money firms spend on environmentally beneficial investments such as renewable generation, energy efficiency, and carbon capture and storage. Rather than crowding out dividends, Green CAPEX was found to considerably influence dividend policy in a positive direction. This reinforces the idea, increasingly popular among sustainable finance scholars, that green investment is a value-improving strategy rather than a substitute for shareholder returns. Companies that channel capital into decarbonization are not simply sacrificing short-term payouts; they appear to be positioning themselves for durable earnings that support both investment and distribution. For investors who have long treated green spending as a cost, the Indonesian evidence offers a counterexample drawn directly from the sector where such spending is most contested.

The study also uncovered two interaction effects that add nuance to the picture. First, the stronger a firm’s ESG performance, the weaker the negative impact of leverage on dividends. Highly indebted companies typically cut payouts to protect their balance sheets, but high ESG performers appear to soften this constraint, possibly because their sustainability credentials give creditors and investors greater confidence in their long-term viability. Second, the stronger a firm’s carbon emission intensity, the weaker the positive impact of profitability on dividends. Profitable but carbon-heavy firms do not translate earnings into payouts as readily as their cleaner peers, suggesting that environmental risk dampens the dividend signal even when the underlying business is performing well. All of the study’s proposed hypotheses were empirically supported, lending coherence to the overall framework.

These findings matter beyond Indonesia’s borders. Emerging markets are where the global energy transition will largely be won or lost, yet most sustainability research draws on data from listed firms in the United States and Europe. By integrating ESG performance, carbon emission intensity, and green capital expenditure into a dynamic dividend policy analysis for an emerging economy, the study helps address a genuine research gap and contributes to the broader literature on dynamic dividend policy. For policymakers, the results hint that sustainability disclosure regimes and green finance incentives may do more than improve corporate behavior; they may also reshape how capital is returned to investors, with cleaner firms becoming more reliable payers. For fund managers screening emerging-market energy stocks, the message is that carbon intensity is not merely an ethical concern but a measurable predictor of payout behavior.

The authors are careful to acknowledge the boundaries of their work. The sample covers a single sector in a single country over a five-year window that includes the disruptions of the pandemic era, and the study relies on aggregate ESG rankings rather than decomposing environmental, social, and governance dimensions separately. Future research, they suggest, could examine sustainability-oriented dividend policies in other industries and countries, probe the impact of individual ESG dimensions, test alternative measures of environmental risk, and explore non-cash dividend payouts in the context of the energy transition. The research was supported by the Indonesia Endowment Fund for Education, and the authors declare no competing interests. Even with these caveats, the study offers a compelling data point in one of finance’s most consequential debates: in Indonesia’s energy sector at least, the companies that pollute less pay more, and the ones investing in a greener future are not asking shareholders to wait.

Subject of Research: The relationship between ESG performance, carbon emission intensity, green capital expenditure, and dividend policy in Indonesia's listed energy firms

Article Title: Do sustainable practices pay dividends? ESG performance, carbon intensity, and green investment in Indonesia’s energy firms

Article References: Do sustainable practices pay dividends? ESG performance, carbon intensity, and green investment in Indonesia’s energy firms. (n.d.). https://doi.org/10.1007/s43621-026-04862-7

Image Credits: AI Generated

DOI: 10.1007/s43621-026-04862-7

Keywords: ESG performance, dividend policy, carbon emission intensity, green capital expenditure, energy sector, Indonesia, system GMM, emerging markets, sustainable finance, corporate sustainability, energy transition, Indonesia Stock Exchange