Mandatory Sustainability Reporting and Financial Tail-risk in Indonesia

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.