ESG and Financial Risk: Does AI Innovation Strengthen the Relationship?
DOI:
https://doi.org/10.33395/owner.v10i4.3658Keywords:
AI Innovation, ESG Performance, Financial Risk, Z-Score, X-ScoreAbstract
This study aims to examine the impact of Environmental, Social, and Governance (ESG) performance on a firm’s financial risk and to explore the moderating role of Artificial intelligence (AI) innovation. This research uses a quantitative approach with secondary data from Indonesia companies listed on Indonesia Stock Exchange for the period 2018 – 2024, resulting in 340 observations. The firm financial risk is measured using Altman Z-Score and Zmijewski X-Score, while the analysis is conducted using panel regression with fixed effects. The results show that ESG performance does not have a significant effect on financial stability as measured by Z-Score, suggesting that the financial benefits of implementing ESG might not be immediately visible in the short-term. However, ESG significantly reduces financial distress risk as measured by the X-Score, indicating that stronger ESG practices increase financial resilience. AI innovation contributes to improving financial outcomes, but does not consistently strengthen them. Overall, this study concludes that ESG performance supported by AI innovation has the potential to lower financial distress. This study contributes to the growing sustainability finance literature by providing empirical evidence from an emerging market on how ESG performance and AI innovation jointly influence firm financial risk.
Downloads
References
Agustin, I. N., & Safitri, D. (2025). Navigating Market Volatility?: ESG and Islamic Stock Performance amidst Covid-19 Stringency. 24(1), 69–84.
Agustin, I. N., Tan, M., & Marheni, D. K. (2025). Assessing the moderating role of geopolitical risk in the nexus between ESG performance and stock price crash risk?: a GMM approach. 26(3). https://doi.org/10.18196/jai.v26i3.26923
Altman, E. I. (2007). The Journal o f FINANCE. 23(4), 589–609.
Antunes, J., Wanke, P., Fonseca, T., & Tan, Y. (2023). Do ESG Risk Scores Influence Financial Distress? Evidence from a Dynamic NDEA Approach. Sustainability (Switzerland), 15(9). https://doi.org/10.3390/su15097560
Arbelo, A., Arbelo-pérez, M., & Pérez-gómez, P. (2021). Profit Efficiency as a Measure of Performance and Frontier Models?: A Resource-Based View. https://doi.org/10.1177/2340944420924336
Ariani, N. P., Sisdyani, E. A., Yasa, G. W., & Ratnadi, N. M. D. (2025). Assessing the impact of Environmental, Social, and Governance (ESG) performance on corporate profitability: The moderating role of firm size. International Journal of Business, Economics and Management, 8(2), 99–107. https://doi.org/10.21744/ijbem.v8n2.2398
Arifuddin, A., Hadisantoso, E., Sari, I. M., & Yulianti, A. F. (2023). How liquidity, profitability, and leverage ratios influence financial distress: A study on Indonesian mining firms. Jurnal Perspektif Pembiayaan Dan Pembangunan Daerah, 11(3), 243–252. https://doi.org/10.22437/ppd.v11i3.27470
August, M., Tundjung, H., & Widuri, R. (2025). ESG and Financial Distress?: Exploring the Moderating Role of ESG Controversy. 8(1976), 361–374.
Awa, H. O., Etim, W., & Ogbonda, E. (2024). Stakeholders, stakeholder theory and Corporate Social Responsibility (CSR). International Journal of Corporate Social Responsibility, 9(1). https://doi.org/10.1186/s40991-024-00094-y
Aydo?mu?, M., Gülay, G., & Ergun, K. (2022). Impact of ESG performance on firm value and profitability. In Borsa Istanbul Review (Vol. 22, pp. S119–S127). Borsa Istanbul Anonim Sirketi. https://doi.org/10.1016/j.bir.2022.11.006
Azam, A., Ahmed, B., Sultana, S., Nisar, P., & Mulla, A. I. (2023). Comparative Analysis of Financial Health of Selected Indian Metals and Mining Companies Using the Altman Z-Score , And Zmijewski Models. 13(5), 519–528.
Bai, H., & Kim, J. (2024). Do ESG Practices Promote Financial Performance? Comparison of English, Chinese, and Korean Papers Through Bibliometric and Meta-Analysis. Sustainability (Switzerland), 16(22). https://doi.org/10.3390/su16229810
Barikah, A., & Author, C. (2025). The Effect of ESG on Financial Distress with Gender Diversity Moderating. 18(2), 794–804.
Boonmee, C., Mangkalakeeree, J., & Jeong, Y. (2025). Towards sustainable digital transformation: AI adoption barriers and enablers among SMEs in Northern Thailand. Sustainable Futures, 10(June), 101169. https://doi.org/10.1016/j.sftr.2025.101169
Brey, B., & van der Marel, E. (2024). The role of human-capital in artificial intelligence adoption. Economics Letters, 244(August). https://doi.org/10.1016/j.econlet.2024.111949
Bui, H. T., Trinh, T. A., Ha, N., Vu, P., Thi, L., Pham, T., & Trieu, H. N. (2026). ESG , firm systematic risk , and economic policy uncertainty?: analysis using deep learning ? based ESG scores.
Ç, M. S. (2021). Borsa _ Istanbul Review A new multivariate approach for assessing corporate financial risk using balance sheets. https://doi.org/10.1016/j.bir.2020.10.007
Chen, D., Esperança, J. P., & Wang, S. (2022). The Impact of Artificial Intelligence on Firm Performance: An Application of the Resource-Based View to e-Commerce Firms. Frontiers in Psychology, 13. https://doi.org/10.3389/fpsyg.2022.884830
Chen, D., & Wang, S. (2024). Digital transformation , innovation capabilities , and servitization as drivers of ESG performance in manufacturing SMEs. 1–16.
Cheng, Z., & Yang, G. (2026). The impact of artificial intelligence on corporate ESG greenwashing. Socio-Economic Planning Sciences, 103(August 2025), 105260. https://doi.org/10.1016/j.seps.2025.102351
C?nd?k, Z., & Armutlulu, I. H. (2021). A revision of Altman Z-Score model and a comparative analysis of Turkish companies ’ financial distress prediction. 3(March), 237–255. https://doi.org/10.3934/NAR.2021012
Cohen, G. (2023). ESG risks and corporate survival. Environment Systems and Decisions, 43(1), 16–21. https://doi.org/10.1007/s10669-022-09886-8
Drori, N. (2026). Industry Offshoring and Firm Internationalization?: Complementarities in External Learning. 52(3), 981–1009. https://doi.org/10.1177/01492063241296838
Feng, R., Ma, L., & Wu, D. (2025). ESG performance and corporate innovation under the moderating effect of firm size. 97(November 2024), 1–10.
Freeman, R. E., & David, L. R. (1983). Stockholders and Stakeholders: A New Perspective on Corporate Governance. California Management Review, 25(3), 88–106. https://doi.org/10.2307/41165018
Friede, G., Busch, T., & Bassen, A. (2015). ESG and financial performance?: aggregated evidence from more than 2000 empirical studies. 0795. https://doi.org/10.1080/20430795.2015.1118917
Fu, C., Yu, C., Guo, M., & Zhang, L. (2024). ESG rating and financial risk of mining industry companies ?. Resources Policy, 88(October 2023), 104308. https://doi.org/10.1016/j.resourpol.2023.104308
Gao, B., Liu, H., Tong, S., & Jin, Y. (2025). Does ESG Performance Reduce Bankruptcy Risk? International Journal of Financial Studies, 13(4). https://doi.org/10.3390/ijfs13040221
Gelashvili-Luik, T., Vihma, P., & Pappel, I. (2025). Navigating the AI revolution: challenges and opportunities for integrating emerging technologies into knowledge management systems. Systematic literature review. Frontiers in Artificial Intelligence, 8(July), 1–16. https://doi.org/10.3389/frai.2025.1595930
Gonzales, J. T. (2023). Implications of AI innovation on economic growth: a panel data study. Journal of Economic Structures, 12(1). https://doi.org/10.1186/s40008-023-00307-w
Habibinejad, H., Alaeddini, M., & Reaidy, P. (2025). Toward trustworthy ESG risk assessment through XAI?: a state-of- the-art review Toward trustworthy ESG risk assessment through XAI?: a state-of-the-art review Hossein Habibinejad Paul Reaidy *. July. https://doi.org/10.1504/IJGAIB.2025.10073995
Handayani, R. S. R. I. (2025). PREDICTING FINANCIAL DISTRESS USING THE ZMIJEWSKI MODEL IN MANUFACTURING COMPANIES WITH HIGH ESG SCORES. 32(3), 920–924.
Handoyo, S. (2026). Assessing the static and dynamic effects of ESG performance on corporate financial and market outcomes: Global evidence from instrumental variable and GMM analyses. International Review of Economics and Finance, 108(March), 105251. https://doi.org/10.1016/j.iref.2026.105251
Hoepner, A. G. F., Oikonomou, I., Sautner, Z., Starks, L. T., & Zhou, X. Y. (2024). ESG shareholder engagement and downside risk. Review of Finance, 28(2), 483–510. https://doi.org/10.1093/rof/rfad034
Hung, M., Bounsanga, J., & Voss, M. W. (2017). Interpretation of correlations in clinical research. In Postgraduate Medicine (Vol. 129, Issue 8, pp. 902–906). Taylor and Francis Inc. https://doi.org/10.1080/00325481.2017.1383820
Jackson, I., Ivanov, D., Dolgui, A., & Namdar, J. (2024). Generative artificial intelligence in supply chain and operations management?: a capability-based framework for analysis and implementation capability-based framework for analysis and implementation. 7543. https://doi.org/10.1080/00207543.2024.2309309
Jiang, Y., & Lin, H. (2026). Bridging sustainability and value co-creation: The financial and strategic role of ESG performance. International Review of Economics and Finance, 105(December 2025), 104861. https://doi.org/10.1016/j.iref.2025.104861
Kaleem, M., Raza, H., & Ashraf, S. (2024). Does ESG Predict Business Failure in Brazil?? An Application of Machine Learning Techniques.
Kamal, S. I. M., & Visita, L. (2020). Prediction of financial condition of Indonesian banks using Altman Z-Score model. Journal of Islamic Economics, Management, and Business (JIEMB), 2(1), 67–78. https://doi.org/10.21580/jiemb.2020.2.1.7606
Katsampoxakis, I., Griva, A., & Xanthopoulos, S. (2026). ESG Investments?: a Study of Their Role in Risk Management.
Khan, M. (2019). Corporate Governance, ESG, and Stock Returns around the World. Financial Analysts Journal, 75(4), 103–123. https://doi.org/10.1080/0015198X.2019.1654299
Korinth, F., & Lueg, R. (2022). Corporate Sustainability and Risk Management — The U-Shaped Relationships of Disaggregated ESG Rating Scores and Risk in the German Capital Market.
Kumar, M. P., & Kumara, N. V. M. (2020). Since January 2020 Elsevier has created a COVID-19 resource centre with free information in English and Mandarin on the novel coronavirus COVID- 19 . The COVID-19 resource centre is hosted on Elsevier Connect , the company ’ s public news and information . January.
Kwak, S. K., & Kim, J. H. (2017). Statistical data preparation: Management of missing values and outliers. In Korean Journal of Anesthesiology (Vol. 70, Issue 4, pp. 407–411). Korean Society of Anesthesiologists. https://doi.org/10.4097/kjae.2017.70.4.407
Li, S., Spry, L., & Woodall, T. (2021). Corporate social responsibility and corporate reputation: A bibliometric analysis. Journal of Construction Materials, 2(3). https://doi.org/10.36756/jcm.v2.3.2
Lim, T. (2024). Environmental, social, and governance (ESG) and artificial intelligence in finance: State-of-the-art and research takeaways. In Artificial Intelligence Review (Vol. 57, Issue 4). Springer Netherlands. https://doi.org/10.1007/s10462-024-10708-3
Liu, J., Yuan, Y., & Zhu, Z. (2026). The Role of Artificial Intelligence in Enhancing ESG Disclosure Quality in Accounting. Journal of Risk and Financial Management, 19(1), 58. https://doi.org/10.3390/jrfm19010058
Liu, Y., Kumar, S., Liu, H., Li, S., & Zhou, Z. (2025). ESG performance, digital transformation, and green innovation. Humanities and Social Sciences Communications, 12(1). https://doi.org/10.1057/s41599-025-06027-9
Liu, Y., Song, J., Zhou, B., & Liu, J. (2025). Artificial intelligence applications and corporate ESG performance. International Review of Economics and Finance, 104. https://doi.org/10.1016/j.iref.2025.104559
Liu, Z. (2025). Term Sustainability. 0, 53–56. https://doi.org/10.54254/2754-1169/2025.25678
Luo, J. (2025). Artificial intelligence technology application and corporate ESG performance — evidence from national pilot zones for artificial intelligence innovation and application. September, 1–17. https://doi.org/10.3389/frai.2025.1643684
Machucho, R., & Ortiz, D. (2025). The Impacts of Artificial Intelligence on Business Innovation: A Comprehensive Review of Applications, Organizational Challenges, and Ethical Considerations. Systems, 13(4), 1–34. https://doi.org/10.3390/systems13040264
Made Ayu Novitarini, N., & Putu Sudana, I. (2024). Resource-Based View and Corporate Sustainability Performance. Dinasti International Journal of Education Management And Social Science, 6(2), 1198–1212. https://doi.org/10.38035/dijemss.v6i2.3731
Martini, R., Aksara, R. R., Sari, K. R., & Hartati, S. (2023). Comparison of Financial Distress Predictions With. 3, 11–21.
Mavengere, K., & Gumede, P. (2024). FINANCIAL DISTRESS PREDICTION COMPETENCE OF THE ALTMAN Z SCORE AND ZMIJEWSKI MODEL?: EVIDENCE FROM SELECTED ZIMBABWE STOCK EXCHANGE FIRMS. 11, 9–15. https://doi.org/10.17261/Pressacademia.2024.1892
Naysary, B., Kamal, J. Bin, Mirpoorian, S. N., & Shrestha, K. (2025). Estimating the causal impact of the Paris agreement on the ESG market: A Bayesian structural time-series approach. Journal of Environmental Management, 395(June), 127829. https://doi.org/10.1016/j.jenvman.2025.127829
Nerotumilena, T., & Winarna, J. (2024). JBTI?: Jurnal Bisnis?: Teori dan Implementasi. 15(3), 273–287.
Ni, Y., Nyhoff, J., Napier, M., & Townsend, D. (2026). AI Innovation and Bank Performance?: Evidence from Patent Activity of Large U . S . Commercial Banks.
Nurjanah, S., Natanael Wijaya, S., Komara, A., & Yudi Mahadianto, M. (2021). International Journal of Business, Economics and Social Development Financial Performance Evaluation: The Role of ROA and ROE in Increase Company Value. 6(2), 264–270. https://journal.rescollacomm.com/index.php/ijbesd/index
Nuzula Agustin, I., Suhendri, N., Wang, A., Bisnis dan Manajemen, F., & Riset Akuntansi dan Keuangan, J. (2024). ESG Performance and Indonesia Stock Return. https://doi.org/10.17509/xxxx.xxx
OJK. (2017). SAL POJK 51 - keuangan berkelanjutan.
Riegler, M. (2025). Bureaucracy cost perspective of ESG implementation in German credit cooperatives. Journal of Business Economics, 107–127. https://doi.org/10.1007/s11573-025-01238-7
Shafique, I., Khan, T., Rana, S., & Ferraris, A. (2026). The role of AI-powered big data analytics in enhancing firm ESG performance: mediating and moderating effects. Behaviour and Information Technology, 3001. https://doi.org/10.1080/0144929X.2026.2641606
Spulbar, C. (2025). ALTMAN Z-SCORE MODELING AND FINANCIAL RISK ANALYSIS?: AN EMPIRICAL STUDY ON COMPANIES LISTED ON THE BUCHAREST STOCK EXCHANGE. 20(20), 314–340. https://doi.org/10.2478/sbe-2025-0037
Suttipun, M. (2023). ESG Performance and Corporate Financial Risk of the Alternative Capital Market in Thailand. Cogent Business and Management, 10(1). https://doi.org/10.1080/23311975.2023.2168290
Tao, J. (2023). Study on the impact of ESG performance on firm performance. 01016, 1–4.
Valencia, L. R. (2025). Financial Performance and Corporate Governance on Firm Value?: Evidence from Spain.
Wai-Khuen, W., Boon-Heng, T., & Siow-Hooi, T. (2023). The Influence of External Stakeholders on Environmental, Social, and Governance (ESG) Reporting: Toward a Conceptual Framework for ESG Disclosure. Foresight and STI Governance, 17(2), 9–20. https://doi.org/10.17323/2500-2597.2023.2.9.20
Wernerfelt, B. (1995). Sciencedirect_articles_13Mar2017_05-37-01. Strategic Management Journal, 16(3), 171–174.
Wilowski, M. (2023). Three-Quarters of Firms Globally Aren’t Ready for ESG Assessments, KPMG Says. https://www.investopedia.com/up-to-three-quarters-of-firms-globally-are-not-ready-for-esg-requirements-kpmg-says
Wiwaha, G., & Dalimunthe, Z. (2025). Ekombis Review-Jurnal Ilmiah Ekonomi dan Bisnis The Effect Of Environmental, Social, And Governance (ESG) Score On Firm’s Bankruptcy Risk ARTICLE HISTORY. Ekombis Review: Jurnal Ilmiah Ekonomi Dan Bisnis, 13(3), 2989–3002. https://doi.org/10.37676/ekombis.v13i3
Wu, S., Li, X., Du, X., & Li, Z. (2022). The Impact of ESG Performance on Firm Value: The Moderating Role of Ownership Structure. Sustainability (Switzerland), 14(21). https://doi.org/10.3390/su142114507
Yun, S., Ryu, D., & You, W. (2024). Borsa Istanbul Review ESG activities and financial stability?: The case of Korean financial firms. Borsa Istanbul Review, 24(5), 945–951. https://doi.org/10.1016/j.bir.2024.05.007
Zheng, C., Khan, A. M., & Morshedur, M. (2025). ESG Performance and Financial Stability?: A Bibliometric and Meta-Analysis. December, 1–24. https://doi.org/10.1177/21582440251381772
Zheng, C., Mannan Khan, M. A., Rahman, M. M., Moudud-Ul-Huq, S., & Rahman, M. S. (2025). ESG Performance and Financial Stability: A Bibliometric and Meta-Analysis. SAGE Open, 15(4), 1–24. https://doi.org/10.1177/21582440251381772
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2026 Isnaini Nuzula Agustin
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
