The sustainability awareness of banking institutions in Indonesia, its implication on profitability by the mediating role of operational efficiency

Abstract

PurposeThis study aims to propose a solution to accelerate financing support low carbon (circular economy) transition. The authors developed a sustainability governance (SGOV) model and a sustainability governance (SGOV) index as a proxy for the diffusion of sustainability innovation. This study investigates the effect of SGOV practices on profitability with the mediating role of operational efficiency.Design/methodology/approachThe SGOV index consists of 32 and 122 sub-items, constructed using content analysis of annual and sustainability reports published by banks listed on the Indonesia Stock Exchange (IDX) from 2010 to 2020 (404 bank-year observations).FindingsBanks are at a moderate level of sustainability innovation. They are prioritizing the balance aspects of financial, social and environmental. SGOV practice negatively affects profitability. However, operational efficiency plays a positive mediating role that is robust.Research limitations/implicationsThe measurement of the SGOV index uses criteria that have not been tested in previous studies. There is the potential subjectivity in interpreting qualitative data, although this has been minimized by cross-checking the analysis of five raters.Practical implicationsThis study gives feedback for the Indonesia sustainable finance (SF) journey phase I to proceed into SF journey phase II.Social implicationsThe SGOV model can be applied in other industry sectors to know the readiness for entering low carbon (circular economy) transition.Originality/valueThe uniqueness of the scoring technique assuming a step-by-step innovation model to sustainable finance.