Bank Stability in Indonesia's Sustainable Finance Era: Green Finance, ESG Disclosure and Credit Risk

Abstract

The implementation of sustainable finance through green financing and the disclosure of Environmental, Social, and Governance (ESG) is increasingly seen as a strategy to strengthen bank stability. This study aims to analyze the influence of Green Credit Ratio (GCR) and Bloomberg ESG Score on the stability of banks proxied using Accounting Z-score, by including Non-Performing Loans (NPL) as a credit risk indicator and Firm Size as a control variable. The study uses panel data of nine conventional commercial banks listed on the Indonesia Stock Exchange during the 2020–2024 period. The analysis was conducted using the Fixed Effects Model (FEM) with Panel Estimated Generalized Least Squares (EGLS) and White Cross-section Robust Standard Errors estimates to obtain more reliable inferences. The results showed that ESG disclosure had a positive and significant effect on bank stability, while Green Credit Ratio, Non-Performing Loans, and Firm Size did not show a significant influence. These findings indicate that strengthening sustainability transparency makes a more tangible contribution to bank stability than increasing the volume of green financing which is still in the transition stage of implementation. The novelty of this study lies in the development of an empirical model that integrates the Green Credit Ratio and Bloomberg ESG Score in explaining the stability of banks by considering the role of Non-Performing Loans as an internal risk mechanism and Firm Size as a control variable in the context of sustainable finance implementation in the Indonesian banking industry.