Mandatory Sustainability Reporting and Financial Tail-risk in Indonesia
Ni Luh Rosinta Yogantari
The Audit Board of Indonesia, Indonesia.
Putu Permana Bagiada
The Audit Board of Indonesia, Indonesia.
Luh Sri Marlina
The Audit Board of Indonesia, Indonesia.
Muhammad Rafi Bakri *
The Audit Board of Indonesia, Indonesia.
*Author to whom correspondence should be addressed.
Abstract
Background: Mandatory sustainability reporting under Indonesia’s OJK Regulation 51/2017 is expected to reduce information asymmetry through greater ESG transparency. However, evidence on its effectiveness in reducing financial risk among emerging-market financial firms remains mixed.
Aims: To examine whether mandatory sustainability reporting under Indonesia's OJK Regulation 51/2017 affects firm-level downside risk and systemic risk contributions, and whether the effect varies across financial subsectors and firm size.
Study Design: A quasi-experimental panel study exploiting the staggered adoption of mandatory sustainability reporting, using two-way fixed effects with firm-level clustered standard errors, an event study, and difference-in-differences robustness checks.
Place and Duration of Study: Ninety-eight financial firms listed on the Indonesia Stock Exchange over the period 2015 to 2024, yielding a balanced panel of 980 firm-year observations.
Methodology: Risk is measured through Value at Risk, CoVaR, and delta CoVaR. The baseline two-way fixed effects specification is augmented with interaction terms and subsample regressions for banking and non-banking firms, a dynamic decomposition into short-run and long-run windows, and an event study constructed around the year of first adoption.
Results: The full-sample sustainability reporting effect is statistically insignificant, but significant heterogeneity emerges upon stratification. For banking firms, adoption increases measured risk across all three indicators, consistent with a risk revelation mechanism whereby mandatory disclosure surfaces previously hidden ESG exposures. Firm size further moderates this relationship, with larger firms exhibiting stronger effects. The event study confirms clean pre-treatment trends, and the results survive alternative standard errors, exclusion of illiquid observations, and dynamic decomposition into short-run and long-run windows.
Conclusion: Mandatory sustainability reporting operates through a transparency channel whose effects are conditional on subsector characteristics and firm capacity rather than through a uniform risk mitigation channel.
Keywords: Banking, ESG disclosure, financial tail-risk, Indonesia, mandatory sustainability reporting, systemic risk, value at risk